Report of theCompany Law Review

Group

2009

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Report of the Company Law Review Group 2009

Table of Contents

Chairman’s Letter, Membership and Functions of the Company Law Review Group

Chapter 1: Update on the Companies Consolidation and Reform Bill

Chapter 2: Registration Issues2.1 Powers of the Registrar of Companies to rectify incorrect entries made in the

Register of Companies

2.2 Examine the need for provisions regarding the re-use of CRO information.

2.3 Requirement for persons seeking to inspect companies' registers of members toshow a legitimate purpose

2.4 Rented accommodation used as registered offices causing problems forlandlords

Chapter 3: Partnership LawConsider the need for limited liability partnerships (LLPs)

Chapter 4: Modernisation Issues4.1 Distributions and Share Capital

4.2 Consider the extension of the audit exemption regime to small companieslimited by guarantee

4.3 Further consider the extension of the audit exemption regime to dormantsubsidiaries.

4.4 Capital Maintenance: Member State Options under recent amendments to theSecond Company Law Directive

Chapter 5: Items brought forward to the next Work Programme

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Chairman’s Letter and Membership of the Company Law ReviewGroup to the Minister

Dear Minister,

It is my pleasure to present to you the report of the Company Law Review Group for2009.

This Report addresses a number of wide ranging issues in company law. Of particularimportance are the modernisation issues considered in relation to distributions bycompanies and requirements concerning share capital, the extension of the auditexemption to companies limited by guarantee and to dormant subsidiaries in acorporate group. It is hoped that if our recommendations on these matters are acceptedby you and the Government that these will be included in the forthcoming CompaniesBill.

Company law and corporate governance have been receiving significant public andpolitical attentionin the last 18 months. No company law code can, however, guarantee that individualswill not act recklessly or that businesses will not fail. Indeed, the Companies Acts areessentially a facilitative framework; they facilitate doing business through a legalperson, provide members with limited liability, provide a framework for theownership and management of companies and the relationship between the ownersand the managers. In considering what provisions should be included in theCompanies Acts, the Review Group has sought to distinguish the law relating to theworkings of companies from the law relating to the activities of companies (orpartnerships, sole traders, foreign companies etc). The former is the legitimateconcern of the Companies Acts. The latter i.e. the regulation of activities that persons(including companies) can engage in are not properly the subject of the CompaniesActs.

Sometimes people look to company law to provide solutions where there have beenfailures in the regulation of activities that some companies have engaged in. Companylaw does not and cannot, however, provide answers to failures in banking, charities orproperty management. I believe that when the recommendations of the Review Groupare enacted, that Ireland will have a state of the art company law code which willprovide a modern and efficient vehicle for business and other groups who want tooperate through a legal entity.

It is understood that the new Bill is unlikely to be published before the end of 2011and although it is disappointing that the process is taking so long, it is, I believe moreimportant that it is done properly. The Bill is likely to be the largest single enactmentin the history of the State and whilst company law in Ireland is no less complex than itis in the United Kingdom the reality is that the State’s resources are fewer and havebeen stretched even further by the work needed on two Companies Bills prepared in2009 as well as a significant number of complex legislative enactments addressing thecrisis in Irish banking.

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The priority which you have given in the new work programme for the Review Groupto assist in the finalisation of the Bill ahead of addressing new issues is mostwelcome. Important and all as new matters may be, the priority has to be thepublication of the new Companies Bill. The Review Group is committed to seeing thisprocess through and we look forward to working with your Department in refining theheads of Bill and assisting in the drafting process in every way we can.

I would like to thank you Minister for your consistent support and encouragement tothe Review Group and also to acknowledge the tremendous commitment, courtesyand professionalism of the people in the Department of Enterprise Trade andInnovation. The Review Group has been fortunate once again in Mr John P Kelly’sappointment as secretary to the group and I am indebted to him and to the others inthe secretariat for assisting me and the other members of the Review Group.

Yours sincerely,

Dr Thomas B CourtneyChairperson

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Members of the Company Law Review Group

1. Dr. Thomas B. Courtney, Chair, Arthur Cox

2. Paul Appleby, Office of the Director of Corporate Enforcement

3. Deirdre-Ann Barr, Matheson, Ormsby, Prentice

4. Jonathan Buttimore, Office of the Attorney General

5. Daryl Byrne, Irish Stock Exchange

6. Jim Byrne, Revenue Commissioners

7. Marie Daly, IBEC

8. Ian Drennan, Irish Auditing and Accounting Supervisory Authority

9. Paul Egan, The Minister

10. Paul Farrell (replaced by Helen Dixon in November 2009), Registrar ofCompanies

11. Mark Fielding, Irish Small and Medium Enterprises

12. Michael Halpenny, SIPTU

13. Tanya Holly, Department of Enterprise, Trade and Employment

14. William Johnston, Arthur Cox

15. Lyndon MacCann S.C., Bar Council

16. Ralph MacDarby, Institute of Directors

17. Vincent Madigan, Department of Enterprise, Trade and Employment

18. Brian O’Kane (replaced by Kathryn Maybury in November 2009), Small FirmsAssociation

19. George Treacy, Financial Regulator

20. Conall O’Halloran, Chartered Accountants Ireland

21. Mike Percival, Irish Banking Federation

22. Mark Pery Knox Gore, Law Society of Ireland

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23. Nora Rice, Companies Registration Office

24. Noel Rubotham, Courts Service

25. Jon Rock, Institute of Chartered Secretaries and Administrators

26. Patricia Taylor, William Fry Solicitors

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Functions of the CLRG

Part 7, Company Law Enforcement Act, 2001

Section 67Establishment of CLRGThere is hereby established a body to be known as the CLRG.

Section 68

Functions of the Review Group

(1) The Review Group shall monitor, review and advise the Minister on mattersconcerning—

(a) The implementation of the Companies Acts,(b) The amendment of the Companies Acts,(c) The consolidation of the Companies Acts,(d) The introduction of new legislation relating to the operation of

companies and commercial practices in Ireland,(e) The Rules of the Superior Courts and case law judgements insofar as

they relate to the Companies Acts,(f) The approach to issues arising from the State’s membership of the

European Union, insofar as they affect the operation of the CompaniesActs,

(g) International developments in company law, insofar as they mayprovide lessons for improved State practice, and

(h) Other related matters or issues, including issues submitted by theMinister to the Review Group for consideration.

(2) In advising the Minister the Review Group shall seek to promote enterprise,facilitate commerce, simplify the operation of the Companies Acts, enhance corporategovernance and encourage commercial probity.

Section 69

Membership of Review Group

(1) The Review Group shall consist of such and so many persons as theMinister from time to time appoints to be members of the Review Group.

(2) The Minister shall from time to time appoint a member of the ReviewGroup to be its chairperson.

(3) Members of the Review Group shall be paid such remuneration andallowances for expenses as the Minister, with the consent of the Ministerfor Finance, may from time to time determine.

(4) A member of the Review Group may at any time resign his or hermembership of the Review Group by letter addressed to the Minister.

(5) The Minister may at any time, for stated reasons, terminate a person’smembership of the Review Group.

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Section 70

Meetings and business of Review Group

(1) The Minister shall, at least once in every 2 years, after consultation withthe Review Group, determine the programme of work to be undertaken bythe Review Group over the ensuing specified period.

(2) Notwithstanding Subsection (1), the Minister may, from time to time,amend the Review Group’s work programme, including the period towhich it relates.

(3) The Review Group shall hold such and so many meetings as may benecessary for the performance of its functions and the achievement of itswork programme and may make such arrangements for the conduct of itsmeetings and business (including by the establishment of sub-committeesand the fixing of a quorum for a meeting) as it considers appropriate.

(4) In the absence of the chairperson from a meeting of the Review Group, themembers present shall elect one of their numbers to be chairperson for thatmeeting.

(5) A member of the Review Group, other than the chairperson, who is unableto attend a meeting of the Review Group, may nominate a deputy to attendin his or her place.

Section 71Annual Report and provision of information to Minister

(1) No later than 3 months after the end of each calendar year, the Review Groupshall make a report to the Minister on its activities during that year and theMinister shall cause copies of the report to be laid before each House of theOireachtas within a period of 2 months from the receipt of the report.

(2) A report under Subsection (1) shall include information in such form andregarding such matters as the Minister may direct.

(3) The Review Group shall, if so requested by the Minister, provide a report tothe Minister on any matter—

(a) concerning the functions or activities of the Review Group, or(b) referred by the Minister to the Review Group for its advice.

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Work Programme for the years 2008-2009

Item

1 Provide ongoing advice to the Department of Enterprise, Trade andEmployment on EU proposals relating to the European Private Company(EPC).

2 Generally advise the Department of Enterprise, Trade and Employment onqueries raised by the Parliamentary Draftsman arising from the drafting ofthe new Companies Bill, as requested by the Department.

3 Examine the need for powers to permit the Registrar of Companies to rectifyentries made in the register of companies.

4 Examine the need for provisions regarding the re-use of CRO information.

5 Consider the need for limited liability partnerships (LLPs).

6 Re-examine the provisions regarding distributions and share capital.

7 Consider the extension of the audit exemption regime to small companieslimited by guarantee which are formed, for example, to run clubs/communityorganisations etc.

8 Further consider the extension of the audit exemption regime to dormantsubsidiaries.

9 Consider the need to include provisions like those found in sections 116 and117 of the UK Companies Act 2006 into Head 38 of Chapter 5, Part A4 ofthe General Scheme of the Companies Consolidation and Reform Bill.

(This emanates from a submission from Bank of Ireland about the improperuse of company registers of members by telemarketing companies. The UKchanged their legislation taking this into account.)

10 Examine section 376 of the Companies Act 1963 as amended by section 13of the Companies (Amendment) Act 1982, and in particular, examine theremoval of the limit restricting size of partnerships to twenty members.

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Item

11 Review the optional elements under the Second Directive 2006/68/EC(Capital Maintenance).

12 Rented accommodation used as registered offices causing problems forlandlords.

13 Advise the Department of Enterprise, Trade and Employment on the variousrequirements on auditors to report under criminal justice legislation, undercompany law and, in particular, Recommendations arising out of the OECDConvention on Combating Bribery of Foreign Officials in InternationalBusiness Transactions.

Advise the Department on the possibility of streamlining the variousobligations.

14 Consideration of the adoption, in Irish company law, of the UNCITRALModel Law on Cross-Border Insolvency.

15 To examine specific provisions under the Companies Acts and to review if,in practice, their application is consistent with the underlying policyobjectives of the legislation, including improved compliance. Namely:

Abuse of Strike-off provisions;

Late-filing penalties, and, in particular, the loss of exemption from theneed to conduct a statutory audit;

With reference to a small, select number of offences, consider whetherthere is proportionality between the seriousness of the offence (and thelikelihood of malpractice) and its enforcement and whether offencesunder the Companies Acts should be subject to civil or criminal action, orboth.

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Chapter 1: Update on the Companies Consolidation and Reform Bill

1.1 Company Law Review GroupThe Company Law Review Group was established under the 2001 Act to advise theMinister on changes required in companies’ legislation and more specifically, topromote enterprise, simplify legislation and enhance corporate governance. TheReview Group consists of business representatives, company law practitioners, IBEC,ICTU and Government Agencies, including Revenue Commissioners, Office of theDirector of Corporate Enforcement and the Irish Auditing and AccountingSupervisory Authority (IAASA).

1.2 Companies Consolidation and Reform BillThe major activity of the Review Group since its establishment has been the draftingof the heads of a Bill to modernise and consolidate company law. The Grouppresented the General Scheme of the Companies Consolidation and Reform Bill1 tothe Minister for Enterprise, Trade and Employment in March 2007.

The General Scheme of the Companies Consolidation and Reform Bill was a massiveundertaking (it runs to nearly 1,300 heads) which was the culmination of the firstseven years, including three reports, of the Review Group’s work. As well as theconsolidation of the existing fifteen Companies Acts since 1963 and numerousstatutory instruments into one piece of legislation, the General Scheme modernisesand simplifies the company law regime in Ireland.

An important aspect of the General Scheme is that it modernises the law to reflectmodern business practice. The proposed new regime will revolve around the ‘privatecompany limited by shares’, which represents 90% of businesses operating through acompany structure in Ireland today. (Previous legislation was based on the publiclimited company model.) The provisions (see para 1.3 below) relating to the newmodel company are now wholly integrated and, as a result, will be more easilyaccessible to company officers and practitioners.

What are the benefits for Ireland? Ireland’s reputation as a competitive location forbusiness investment is enhanced as it sends a strong message that Irish company lawis modern, with simplified procedures for establishing and operating a company,while maintaining a strong compliance and enforcement regime. This consolidationand modernisation is timely as other common-law jurisdictions, such as the UK, HongKong, Canada and New Zealand have also reformed their companies’ codes.

1.3 Key Provisions of the General Scheme of the BillThe key features of the new ‘private company model’ provided for in the GeneralScheme are:

1. It will have a one-document Constitution, which will replace theMemorandum and Articles of Association.

2. It will not be required to have an ‘objects’ clause in its Constitution(i.e., limiting it to certain types of activities), which is seen as unnecessarilyrestrictive.

1See www.clrg.org

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3. The new company type will be required to have just one Director (currentlytwo). But the Company Secretary cannot be the same person as the soleDirector.

4. In general, it may have between 1 and 99 members.5. It will be limited by shares and must have a share capital.6. Members can waive the holding of an AGM (but if 10% of the membership

request an EGM it must be held). All decisions of the company must berecorded.

7. For specific activities (e.g. loans for Directors), currently restricted by law,the new Bill provides that Directors may do so by undertaking a ‘validationprocedure’ to the effect that the company is solvent. A Director may be heldpersonally liable, without limit, for any subsequent debts of the company.

8. The company will be eligible for audit exemption up to a higher threshold.(Exemption from audit removes the need for companies to engage anindependent, external auditor to carry out a statutory audit of a company.).

The net effect of these proposed changes will be to ease the regulatory burdenattaching to the establishment and operation of private companies in Ireland. It willbe easier for companies to undertake business activities and operate on a daily basis,subject to certain safeguards. The full duties of Company Directors and CompanySecretaries in complying with the law are clearly set out. Also, the powers of theenforcement agencies, which have been strengthened in recent years, have beenmaintained and brought together clearly in the General Scheme.

The Bill will have two main divisions referred to in the General Scheme as Pillar Aand Pillar B. Pillar A sets out the law applicable to the private company limited byshares and contain 15 Parts (circa 850 sections of law or 2/3rds of the Bill). Everycompany law provision which a user or advisor to a private company needs to knowwill be contained in Pillar A.

Pillar B (circa 400 sections) will contain the law applicable to every other companytype: the PLC, a new type of private company called a Designated Activity Company(DAC), guarantee companies, unlimited companies, unregistered companies, externalcompanies and investment companies. The law applicable to those companies will beset out by reference to Pillar A, but with carve-outs and additions.

1.4 Current PositionCurrently, all the parts of Pillar A have been drafted by the Office of theParliamentary Counsel. Officials from the Department of Enterprise have activelyengaged with the OPC to discuss issues arising from these provisions.

Pillar A is expected to be completed by the end of 2010. It is expected that the fullBill will be completed towards the Autumn of 2011.

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Chapter 2: Registration Issues

2.1 Powers of the Registrar of Companies to rectify incorrect entries made in theRegister of Companies

2.1.1 Introduction

The Company Law Review Group considered this issue in its 2007 Report and theMinister agreed to have the matter extended into its 2008-2009 Work Programme.

It occurs from time to time that companies lodge forms that become registered in theCompanies Registration Office, but which are subsequently found by the company tohave inadvertently contained incorrect information.

It would seem appropriate to have a straightforward mechanism to correct the register.Currently only limited provision exists, as provided by section 122(5) of the 1963 Act.

2.1.2 Position set out in the 2007 Report

The Review Group was of the view that it was crucial to business that the register ofcharges provides certainty. Allowing alterations to that register without properconsideration could prove very injurious to third parties, especially creditors, and thereputation of Ireland as a place to do business.

The Review Group also considered that if there was discretion vested in the Registrarto reject applications for any reason, consideration had to be given to an appeal to theCourt against any decision. In principle, the Review Group was of the opinion thatthere should be a mechanism to facilitate factual, straightforward amendments to theregister that are required to be made as a result of genuine and inadvertent clericalmistakes.

However, it was agreed that the provision of such a mechanism raised thefundamental question of the role and purpose of the register. Two major issues thatremain to be addressed are whether the mechanism should be confined to correctionsof limited, specified data and whether the Registrar should be permitted to refuseapplications for rectification which he considers to be dubious or suspect.

2.1.3 Current Views of the Companies Registration Office

The Companies Registration Office considers that although it would be desirable tohave a simple mechanism to correct clerical errors on the register, significant issuesarise as set out in terms of the role of the Registry and the practicalities of being ableto distinguish between cases of wrong-doing versus simple error.

An adjudication role for the Registrar as to whether or not registered submissionsought to be amended/removed would be quasi-judicial in nature and the CRO wouldforesee significant practical difficulties in terms of administering same, particularly incases where shareholders and/or directors of a company are in dispute leading to

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conflicting filings with CRO in relation to that company. It would not appear to be thecase that any further evidence has been adduced of such a system of rectificationleading to successful results in any other jurisdiction. Accordingly, the current CROsystem of permitting filing and placement on the register of a replacement submission(with the original submission remaining on the register) appears to be, on balance, themost optimal situation.

2.1.4 The Review Group’s Consideration of the Issue

The Review Group acknowledges the risks that the CRO has raised in relation towrong-doers attempting to mislead the public by filing incorrect information e.g.filing a form to show that a person was not a director of a company etc. The ReviewGroup was, however, strongly influenced by the fact that the register is notdeterminative of rights: it records and registers events that have happened incompanies, the validity and effectiveness of which does not turn on their beingregistered. The real problem for companies which make genuine mistakes in filings isthat subsequent filings can be rejected where the correct information is in conflictwith the information filed in error. So, a subsequently filed annual return can berejected by the CRO because it conflicts with information contained in a formpreviously filed in error and unless the company obtains a High Court order, thecompany is likely to be struck-off the register to its detriment and that of itsshareholders and creditors.

2.1.5 Recommendation

The Review Group recommends that companies should be permitted to rectifyinaccurate or incorrect particulars which have been delivered to the CRO and that thisshould be permitted by allowing companies to file a form rectifying any informationpreviously filed incorrectly subject to the following safeguards:

1. The only mistakes capable of being corrected should be those resulting fromthe erroneous completion of the original prescribed form resulting from themistaken transcription of information from an original document whichcontained that information.

2. The rectification procedure should not be available in the case of filings wheresubstantive rights result from the filing e.g. the delivery of a C1 pursuant tosection 99 of the Companies Act 1963 is required if the charge to which isrelates is not to be void.

3. The original legal or accounting document which was incorrectly transcribed(or an extract thereof) must accompany the prescribed form rectifying theerror.

4. The originally filed information should not be removed from the register butretained and publicly available for inspection by anyone.

5. The form notifying the error should contain a certificate signed by all of thedirectors and the company's solicitor or auditor which attests the existence and

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validity of the original document, the particulars of which were mis-transcribed into the originally filed prescribed form.

6. It should be an offence to file a rectifying form which does not comply withthe foregoing requirements which should be a Category 2 offence, carrying amaximum term of imprisonment of 5 years and a significant fine forconviction on indictment.

While the foregoing sets out the terms in which the necessary changes might beconsidered, some fine-tuning of the detail involving consultation between the CROand stakeholders would be necessary before the final shape of an appropriate headcould be finalised.

2.2 Examine the need for provisions regarding the re-use of CRO information

2.2.1 BackgroundThe issue of re-use of information in the Companies Registration Office waspreviously considered by the Company Law Review Group in its 2007 Report. In itsconclusion, the Review Group acknowledged that certain concerns such as identitytheft and data protection issues had arisen and that more work was needed before arecommendation could be made. At the request of the Review Group, the Ministeragreed to have the matter extended into its 2008-2009 Work Programme

2.2.2 IntroductionThe Companies Registration Office stores data electronically in two Parts. Part 1 hasbeen in existence since 1985 and is the database containing all the information oncompanies that is stored in data fields and thereby amenable to analysis, such asnames, addresses, officers’ names and addresses and details of charges. Included inPart 2 are images of all documents filed since 1990 and all other documents on all livecompanies, as well as images of scanned documents that are filed. Extracts from thisdatabase can be purchased in bulk, pursuant to a licence agreement.

2.2.3 Current PositionThe provision and use of data, maintained at the CRO, is subject to legislation.Section 370 of the 1963 Act provides that any person may (a) inspect the documentskept by the Registrar, on payment of such fee as may be fixed by the Minister and (b)require an extract of any such document on payment of such fee as the Minister mayfix.

With regard to copyright, rights in databases have been created by the DatabaseDirective and by the Copyright and Related Rights Act 2000. The Database Directivecreates a sui generis right in databases. The CRO is currently trying to ascertain howSection 334 of the Copyright and Related Acts 2000, which deals with theinformation open to public inspection or on a statutory register, applies to the re-useof CRO data, particularly in the context of supply to their bulk data customers. Article13 of the Directive however, leaves it open to Member States to make their ownprovisions in respect of public documents.

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2.2.4 Conclusion and RecommendationThe CRO is seeking legal advice to revise the Licence Agreements for customers towhom the CRO sells bulk data from the register. Central to these discussions will bean examination of the issues presenting around personal data and the re-use of suchdata. The issue as to whether there is a requirement for legislation as to the re-use ofCRO data will also be clarified. The Review Group can revisit this matter on a futurework programme if requested to do so by the Minister.

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2.3 Requirement for persons seeking to inspect companies' registers ofmembers to show a legitimate purpose

2.3.1 BackgroundThe Review Group was asked by the Minister to consider the inclusion of provisionsin the General Scheme of the Companies Consolidation and Reform Bill equivalent tothose found in sections 116 and 117 of the UK Companies Act 2006. Theseprovisions require an applicant for a copy of the register of a company to indicate thepurpose for which it would be used, and allows the company to apply to Court for anorder directing the non-disclosure of the register if it is sought for an “improper”purpose. These provisions were prompted following the realisation that persons wereengaged in becoming members of companies to permit them the statutory right toobtain particulars of the other members of those companies for purposes not originallyintended by the legislature.

2.3.2 The UK Position

Section 116 of the UK Companies Act 2006 reads: -

116 Rights to inspect and require copies

(1) The register and the index of members’ names must be open to theinspection—(a) of any member of the company without charge, and(b) of any other person on payment of such fee as may be prescribed.

(2) Any person may require a copy of a company’s register of members, or ofany part of it, on payment of such fee as may be prescribed.

(3) A person seeking to exercise either of the rights conferred by this sectionmust make a request to the company to that effect.

(4) The request must contain the following information—(a) in the case of an individual, his name and address;(b) in the case of an organisation, the name and address of an

individual responsible for making the request on behalf of theorganisation;

(c) the purpose for which the information is to be used; and(d) whether the information will be disclosed to any other person, and

if so—(i) where that person is an individual, his name and address,(ii) where that person is an organisation, the name and address

of an individual responsible for receiving the information onitsbehalf, and

(iii) the purpose for which the information is to be used by thatperson.

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The UK CLR recommended that information in a company’s register of membersshould be made available only for certain specified purposes. Section 116 of the UKAct modifies the rights of inspection and to be provided with copies of the register ofmembers and its index. Subsections (3) and (4), which are new, require those seekingto inspect or to be provided with a copy of the register of members to provide theirnames and addresses, the purpose for which the information will be used, and, if theaccess is sought on behalf of others, similar information for them.

Section 117 of the UK Companies Act 2006 reads: -

117 Register of members: response to request for inspection or copy

(1) Where a company receives a request under section 116 (register of members:right to inspect and require copy), it must within five working days either—

(a) comply with the request, or(b) apply to the court.

(2) If it applies to the court it must notify the person making the request.

(3) If on an application under this section the court is satisfied that the inspectionor copy is not sought for a proper purpose—

(a) it shall direct the company not to comply with the request, and(b) it may further order that the company’s costs (in Scotland, expenses)

on the application be paid in whole or in part by the person who madethe request, even if he is not a party to the application.

(4) If the court makes such a direction and it appears to the court that thecompanyis or may be subject to other requests made for a similar purpose (whethermade by the same person or different persons), it may direct that the companyis not to comply with any such request.The order must contain such provision as appears to the court appropriate toidentify the requests to which it applies.

(5) If on an application under this section the court does not direct the companynot to comply with the request, the company must comply with the requestimmediately upon the court giving its decision or, as the case may be, theproceedings being discontinued.

Section 117 of the UK Act provides a procedure by which the company can refer thematter to the court if it thinks that the request may not be for a proper purpose. Itreplaces the 10-day deadline for compliance with a request with a 5-day period withinwhich the company must either comply with the request or apply to the court for relieffrom the obligation. If the company opts for the latter, then subsections (3), (4) and(5) apply. Under subsection (3), if the court is satisfied that the access to the registerof members is not sought for a proper purpose, it will relieve the company of theobligation to comply with the request and may order that the person who made the

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request pay the company’s costs. Under subsection (4), the court may also direct thecompany not to comply with other requests made for similar purposes. If the courtdoes not make an order under subsection (3), or the proceedings are discontinued,then, under subsection (5), the company must immediately comply with the request.

2.3.3 The Review Group’s consideration of the issues

The Review Group considered that section 116(1) of the UK Companies Act 2006which entitles members of all companies to inspect their companies’ registers ofmembers and also to obtain copies of those registers on request, was open to the samepotential abuse as was found to exist in the United Kingdom. The Review Groupbelieves that the risk is most acute in public limited companies (PLCs) and mindfulthat it was important for the State that our Companies Acts support companies whichdecide to register in Ireland, was mindful not to leave Irish listed PLCs at adisadvantage to those of our neighbour. The Review Group was, however, minded todistinguish PLCs from other types of company e.g. private companies and publicunlimited and limited by guarantee companies, where it was thought only appropriatethat members should have an unfettered right to ascertain the particulars of theirfellow members which are listed in the register of members.

2.3.4 Conclusion and Recommendation

The Review Group was minded to amend Irish law in line with the recent changes inthe United Kingdom in the nature of provisions analogous to sections 116 and 117 ofthe UK Companies Act 2006. The Review Group was conscious, however, thatchanges to the law relating to the inspection of the register of members would, inisolation, not provide a complete answer to the matter since companies wouldcontinue to be obliged to file this information which would appear on the publicregister. Accordingly, no recommendation is being made on this point until theoutcome of the review by the CRO on the reuse of information referred to inparagraph 2.2.4.

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2.4 Rented accommodation used as registered offices causing problems forlandlords

2.4.1 IntroductionThe Company Law Review Group was asked by the Minister to consider a proposalby a landlord that the Companies Acts be amended to prevent tenants of residentialproperty from using the address of a property as a company’s registered office withoutthe prior written consent of the owner to that usage.

2.4.2 BackgroundA submission was received by the CLRG which proposed that the forms forregistration of a company and the submission of its annual return be amended toensure that the company has the owner’s prior written consent for the use of rentedpremises as the registered office. The submission came from a landlord who owns anumber of properties that are let for residential use, the addresses of which have beenused without the landlord’s consent as registered offices by companies that have noconnection with the properties.

2.4.3 Issues arising

1. An unworkable requirement of retrospective approvalThe proposal to amend Form A1 (application for incorporation) and Form B2 (changeof address of registered office) to require the prior written consent from the owner ofthe premises where the registered office is located would necessitate legislativeprovisions, and a Forms Order giving effect to same. The proposal implies that, in theabsence of the owner’s prior written consent, the CRO ought not to accept and registerForms A1 and B2 and enter on the public register the registered office address that hasbeen notified by a company. As CRO will not know whether or not a particularpremises is rented, the owner’s consent would have to be supplied by companies inrespect of each and every Form A1 and B2.

As Form B2 is an after-the-event notification of change of registered office, theproposed change, if implemented, would introduce an unworkable requirement ofretrospective approval by the Registrar of a registered office to which the companyhad already moved.

A further concern is that electronic filing of B2 Forms (which is free of charge andhence widely availed of by companies) would cease if it were to become arequirement that the company attach the owner’s prior written consent to the FormB2. At present, the vast majority of Forms B2 are electronically filed by companies,which frees up CRO staff resources to tackle other work. CRO is reluctant to endorseany proposal that would adversely impact on the uptake of electronic filing ofstatutory notifications.

There would also be a significant resource issue in terms of additional checks havingto be carried out by CRO in respect of every application for incorporation and everynotification of change of registered office (approximately 39,000 applications in total

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per annum). In practical terms, a requirement that CRO verify that the consent of theowner of the premises notified as being the company’s registered office had beenobtained by the company would be an onerous task.

2. Delays in processing formsProcessing of Forms A1 and Forms B2 would be greatly delayed if the CRO wasrequired to vet all applications for incorporation and notifications of change ofregistered office to ensure that the consent of the owner of premises concerned to theuse by the company concerned of the registered office notified to CRO accompaniedthose forms. At present, notifications of change of registered office are generallyprocessed within one week of receipt by CRO. This period would greatly increase ifowner’s consent were to be required to accompany such notifications. The periodwithin which a company could be incorporated would also be significantly increasedif the additional requirement of owner’s consent to the use of the premises where theregistered office is located were to be introduced. These increased processing periodswould be to the detriment both of companies and the public who rely on the publicregister being as up-to-date as possible in terms of company addresses.

3. Difficulties could arise for companies in obtaining the owner’s writtenconsent.Companies generally do not have a freehold interest in the premises they utilise astheir registered office. Frequently, a sublease will be involved, which means that therewill be no contractual relationship between the company, as tenant in occupation, andthe owner of the freehold. Furthermore, in many cases, a company will elect to haveas its registered office the business address of its accountants or solicitors, which firmmay well be in occupation as a tenant. Again in this instance, the landlord of thepremises will not have a contractual relationship with the companies which havenominated their agent’s business address as their registered office. In thesecircumstances a requirement that the company furnish the consent of the “owner”would be administratively unworkable.

4. How is the term “owner” to be legally defined?Where the company occupies premises on foot of a lease, is the “owner” of thepremises the company’s immediate landlord, or the landlord’s landlord or the ultimateowner of the freehold, where there is a sub-lease situation?In addition, it would be impractical for the Companies Registration Office to checkfreeholds, leaseholds (in particular long leases) and subleases, or Land Registry orRegistry of Deeds so as to establish the identity of the “owner” of the premises wherethe registered office of a company is located. Verification procedures by the CRO asto the ultimate owner/landlord of a particular premises would be a very lengthy/costlyadministrative burden and would lack certainty. Furthermore, the absence ofverification, where consent of the person said to be the owner was to be accepted atface value and in good faith by CRO, could render the provision totally ineffective inpractice.

5. Enforcement issuesEnforcement of this proposal would be problematic and expensive. In particular, itwould not be clear from the registered records that a breach had taken place and thiswould require ODCE in each and every case to obtain evidence from the landlord ofsuch breach.

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6. Broader issuesThis submission raises other issues, namely the difficulty in serving papers on thecompany; difficulty in notifying the company that an order has been made against it(e.g. disclosure order under s.102 of CA 1990); and annoyance to the actual occupierof the premises. However, it is not proposed to treat these at this stage.

It seems that a partial solution to the difficulty outlined by the landlord in thesubmission would be for a landlord to prohibit the use of his/her property as aregistered office of a company by means of a clause in the lease. The breach wouldthen be a matter of contract law between the landlord and the tenant. However, adifficulty would still arise for the landlord where the company has no connectionwhatsoever with the property, despite the property being notified to CRO as its“registered office”.

Another solution in such cases would be that the landlord/creditor/any otherconcerned parties could notify the ODCE and the CRO that the particular company isnot receiving correspondence at its registered office/has no connection with itsregistered office address. It would then be an enforcement/compliance matter forthese bodies to follow up with the directors of these companies (breach of section 242Companies Act 1990, ODCE; breach of section 113 Companies Act 1963,ODCE/CRO).

It is not unknown for tenants (whether natural or legal persons) of rented property tovacate the property without notifying their creditors and without leaving a forwardingaddress. There is undoubted annoyance in having to deal with correspondence inrespect of former tenants or of those who never had any connection with the premises,but tenants’ obligations are specific to them and these obligations do not attach to theproperty or the landlord. It is open to the landlord to return correspondence addressedto former tenants or unknown third parties to sender.

The irritation of receiving unwanted post must be balanced with the administrativecosts that would flow from a requirement to establish proof of ownership of apremises to be used as a registered office of a company and the agreement of theowner to the use of those premises as a company’s registered office. These costswould fall not only on the CRO (and hence on companies through increased filingfees in respect of the A1 and B2) but also on the company directly as theadministrative cost of proving the owner’s title and securing approval in eachindividual case would run to millions of Euro per year.

2.4.4 ConclusionIn summary, the arguments against an amendment to the Companies Acts are:

1. In terms of notification of change of registered office, the proposal would introducean unworkable requirement of retrospective approval by the Registrar of a registeredoffice to which the company has already moved. At present, the Acts allow companiesa period of 14 days after implementing a change in registered office to notify theRegistrar.

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2. The time scales for incorporating companies and registering notifications of changeof registered office would greatly increase, to the detriment of all companies and thegeneral public, if owner’s consent were to be required to accompany such applicationsto CRO.

3. Difficulties could arise in practice for companies in obtaining the owner’s writtenconsent since companies rarely have a freehold interest in the premises they utilise astheir registered office, and may occupy under a sub-lease or else it is their agent whois a tenant of a landlord with whom the company has no connection or relationship.

4. Even if the term “owner” were to be defined in law it would still be very difficult toestablish with certainty whether the owner, whose consent has been obtained, is thecompany’s immediate landlord or the landlord’s landlord or the ultimate owner of thefreehold.

5. Enforcement of this proposal would be problematic and expensive.

2.4.5 RecommendationFor the reasons set out above, the Review Group does not recommend any change inthe law.

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Chapter 3: Partnership Law

3.1 Consider the need for limited liability partnerships (LLPs)

3.2 Introduction

The Company Law Review Group was asked by the Minister for Trade andCommerce to examine the issue of limited liability partnerships (“LLPs”) and thecurrent limitation on the number of partners in partnerships.

In the report of the Company Law Review Group 2007, the Review Group outlinedthe problems which current partnership law is perceived to cause for certain types ofbusiness organisations in Ireland. It explored how the introduction of LLP legislationcould address these problems, citing examples of LLP legislation in otherjurisdictions. It was the view of the Review Group that LLP legislation was deservingof further consideration, as the issues which had led to the introduction of LLPlegislation in other jurisdictions were also relevant in Ireland. However, the ReviewGroup believed that due weight and attention should also be given to any contraryviews which might be expressed by interested parties, including clients and customersof professional service providers. Consideration should also be given to all or anycompeting solutions to the professional liability problem which might render the LLPsolution unnecessary or inappropriate.

The Review Group came to the conclusion that the final decision on whether LLPsshould be introduced, and the shape and form which LLP legislation should take,could only be reached after a full consultation process involving all of those affectedby the issues arising.

With that objective in mind, the Review Group engaged in a public consultation basedaround the following key issues:-

- Does Ireland need a new approach to address the issue of unlimited liability inbusiness partnership arrangements?

- What are the pros and cons of introducing the LLP model, e.g. based on theUS, Canadian or UK models?

- What are the pros and cons of other forms of limitation of liability, whether bymeans of contract or through company incorporation?

- If LLPs were introduced, what safeguards should be brought in to protect theinterests of clients and creditors?

- Are there any other issues regarding LLPs which need to be brought to theattention of the Review Group?

The Review Group also sought comments on the desirability of removing the sizelimit on partnerships.

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3.3 Submissions

The Review Group formulated a series of questions to inform the public consultationprocess. The submissions received by the Review Group are considered below.

Question 1 – Does the availability of insurance not meet concerns about theunlimited personal liability of partners in a general partnership?

A number of respondents stated that there is limited capacity in the insurance market.Not all layers of liability may be fully insurable and a number of insurance providershave exited the professional indemnity insurance market in recent years. Many of thelarge global accounting firms operate captive insurance vehicles which in effectamount to a form of self-insurance.

Question 2 – If policies of insurance are inadequate to meet concerns aboutunlimited personal liability, what are the specific reasons for this? Isinsurance prohibitively expensive?

Some respondents indicated that auditing firms are considered to be an uninsurablerisk by virtue of the very significant claims which were successfully made against anumber of the large global networks, particularly in the late 1980s. Insurancecompanies made significant losses on providing insurance to accounting firms in thisperiod and so have exited the market since then. It was claimed that auditors willalmost inevitably be in some way associated with large corporate failure and thereforethe risk of multi-billion dollar claims against auditing firms effectively renders themuninsurable.

It was also claimed that insurance can be prohibitively expensive or simplyunavoidable for solicitors carrying out higher risk work. The increased volume andmagnitude of business transactions results in potential exposure for Irish solicitorsconsiderably greater than the insurance cover which can be obtained.

Question 3 – Is insurance more of an issue for professional service firm (“PSF”)partnerships than for non-PSF partnerships?

The point was made that where insurance cover does not cover a claim, partners’personal assets can be put at risk. In a PSF partnership it is possible that this couldarise due to the actions of partners over whom they have no control or of whom theyhave little knowledge, particularly in large firms. Non-PSF partnerships are in asimilar position in respect of exposure to liability. However, unlike PSF partnerships,such as solicitors and accountants, there is no regulatory bar on non-PSF partnershipsoperating as companies. They can choose to operate under the protection of a limitedliability company thereby reducing their exposure. For that reason, insurance coverwould appear to be a more pressing issue for PSF partnerships.

Question 4 – If given a choice, would partners in a professional service firm(“PSF”) partnership choose to form a company as a vehicle forcarrying on their profession instead of practising through apartnership?

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There seemed to be a consistent thread running through the submissions received –namely, that the reasons for choosing the partnership model differ from case to case.The benefits of a general partnership to date have included tax transparency,flexibility of entry and exit, privacy (as no financial disclosure is currently requiredunder the general law of partnership), flexibility of injecting and removing capital,ease of management and lesser administrative restrictions than those which areapplied in the case of limited liability companies. It was pointed out that the currentrestriction in Section 187 of the Companies Act 1990, which prohibits a bodycorporate acting as auditor to an Irish company, will be removed when the provisionsof the revised Eighth Directive are incorporated into Irish law. One respondent said itwas not possible to forecast to what extent auditors would migrate to limited liabilitycompany status when it becomes possible for auditors to do auditing business throughsuch an entity. Incorporation would not address the core issue as far as liability riskwas concerned. In the respondent’s view, that issue could only be addressed througha statutory cap on liability.

Question 5 – Is there a substantial risk that partners in a PSF partnership could losetheir personal assets as a result of a claim not covered (orinsufficiently covered) by insurance?

A number of respondents involved in or representing the accountancy and solicitorsprofessions replied that the partners in a PSF partnership could lose their personalassets as a result of a claim which could be well in excess of the level of availableinsurance. Under the current arrangements for many firms the availability ofinsurance was quite limited and the level of cover available to any one firm wouldalso be dependent on claims made against the insurance fund by other firms in thesame network. In the event of very big claims being settled against firms in the globalnetwork, it was quite likely that there would be insufficient funds to cover otherclaims and therefore the personal assets of all partners were exposed.

As a result of Section 44 of the Civil Law (Miscellaneous Provisions) Act 2008 it wasnow possible for a solicitor to contract with a client to limit his/her liability to thatclient, but not below the minimum insurance cover that a solicitor is generallyrequired to carry (this minimum insurance amount currently stands at €2,500,000).However, the practical effect of this new provision remained to be tested, as it wasopen for a client to decline to accept the limitation of liability or switch to a solicitorwho has a higher liability limit or none at all.

Question 6 – Should LLP legislation in Ireland provide for (a) partial shieldprotection (i.e. protection against the negligence of a partner), (b) fullshield protection (i.e. protection against the negligence of a partnerand against the contractual debts of the partnership), or (c) separatelegal personality of the LLP?

Responses to this question were mixed. Some respondents preferred separate legalpersonality along the lines of the UK model, while others preferred US-style fullshield protection. No one expressed a clear preference for partial shield protection,though one respondent suggested that any new legislation should “at a minimum”provide for partial shield protection.

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One firm expressed the view that partial shield protection would be a small measureof reform and would be unlikely to cause auditors to migrate to it. The risk of acorporate collapse causing the demise of one of the so called “Big 4” audit firms was,in the view of this respondent, reason enough for bringing in full shield protection.

Question 7 – Should the LLP privilege be available to all forms of business orshould it be limited to certain professions?

The responses were almost evenly divided between those who favoured availability ofLLP status to all forms of business and those who felt it should be limited to certainregulated professions.

Question 8 – Should the safeguards against misuse of the LLP be contained inprimary legislation or in the rules of the bodies charged with oversightof the relevant professions?

The preponderance of opinion on this point lay in favour of putting the safeguardsagainst use of the LLP structure in the primary legislation. The point was made that ifsuch safeguards are contained in the rules of the bodies charged with the oversight ofthe relevant professions there is a risk that each body may apply the safeguardsdifferently and this may result in the LLPs in certain professions being more heavilyregulated than LLPs in other professions. However, it would still be open toregulatory bodies to impose additional regulations on its own member firms.

Question 9 – Should LLPs be required to undergo registration on a public register?With whom should the LLP be required to register?

The majority view was that a system of public registration should be put in place andthat the Companies Registration Office was the obvious choice as registrar.

Question 10 - Should LLPs be required to make financial disclosure similar tolimited companies?

Most respondents practising in the accounting and legal professions felt that thereshould be no financial disclosure requirement. However, three internationalaccounting firms made submissions to the effect that some level of financialdisclosure should be required. One such firm suggested that disclosure should berequired in the form of an audited balance sheet but that there was no justification forextending the disclosure requirement to the profit and loss account and details ofpartner income. The Revenue Commissioners and the ODCE were in favour ofmandatory financial disclosure.

Question 11 - Can the problem of unlimited personal liability in partnerships beaddressed by other means, without resort to a new LLP structure? Arecontractual limits on liability or statutory caps on liability a viablealternative to the introduction of LLPs?

Most respondents from the accountancy and legal professions argued that contractuallimits on liability were not a viable alternative. As one respondent noted, “while it is

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clear that solicitors can now limit their liability by contract, this only goes so far. Insome cases it may not be possible to negotiate adequate limits on liability or thecontractual limits may not be fully effective.” It was noted that contractual caps onauditor liability have been introduced in the UK following changes made by theCompanies Act 2006. However, two of the respondents were sceptical about whetherlisted companies would agree to have limits placed on their auditors’ liability.

There was some support among accountancy firms for the idea of a statutory cap onliability as an alternative to the introduction of LLPs.

Question 12 - Is the introduction of LLPs of interest to the financial services industryin Ireland?

Respondents either declined to comment or said that they believed that it would be ofinterest to the financial services industry, but without providing any support orevidence for this belief.

Question 13 - Does Ireland need a new approach to address the issue of unlimitedliability in partnerships?

It was argued, in submissions made on behalf of the legal and accountancyprofessions, that the imposition of unlimited liability on partners in Irish partnershipsputs them at a distinct competitive disadvantage to their European and NorthAmerican counterparts. One respondent stated “the work and size of partnerships inthe twenty-first century means that the imposition of unlimited liability on partners inlaw firms, and in particular on innocent partners for the negligent acts committed byanother partner, is no longer justifiable.” In the view of another respondent, partialshield protection would be a positive development at a minimum.

In another submission, it was argued that the concept of unlimited personal liabilityfor business activity is outdated and does not properly account for the risk/rewardelement involved in professional services work in particular. With the majoreconomic advances in Ireland over the last two decades it is quite conceivable thatprofessionals would be asked to provide services relating to transactions that arevalued at a multiple of their insurance cover. At the same time as maintainingexpensive insurance cover they are being asked to put their personal assets at risk.The limited liability partnership model has been introduced with relative ease andsuccess in a number of jurisdictions. The concerns over tax abuse of the mechanismcould be dealt with by restricting the LLP structure to professional service firms.Anti-avoidance measures similar to those which were introduced in the past inrelation to non-resident Irish companies could be contained in the legislation.

Question 14 - Is the general limit restricting the size of partnerships to twentymembers a constraint on using partnerships as a business model andshould it be removed or is it only a constraint in relation to certainsectoral activities and should it thus be removed only in certainspecific instances?

In general, the submissions made on behalf of the legal and accountancy professionsfavoured the removal of the twenty-partner limit. As one respondent noted, “it may

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be therefore that the limit of twenty be removed for only certain sectors where there isan identified business need, but that it remains in place for trading/investingpartnerships, where members of the public becoming partners may not be fully awareof their potential liabilities for the debts of other partners. Therefore, we believethere is an urgent need to deal with this issue for certain professional services firms,as the current restriction imposes significant administrative difficulties on existingpartnerships which was probably unintended and which in any event may not serveany useful purpose.”

It is worth recalling at this point the requirement to which the removal of the 20-partner limit for accountants is subject. Under Section 13(1) of the Companies(Amendment) Act, 1982 the 20-partner limit does not apply to partnerships ofaccountants provided that each partner is a person qualified to act as auditor of acompany. The 20-partner limit is not removed if the partnership consists partly ofpersons qualified to act as auditor and partly of persons who are not so qualified. Thisrequirement that a partnership of more than 20 accountants must consist entirely ofpersons qualified to act as auditors is seen as an obstacle to the development ofmultidisciplinary and international partnerships of accountants.

No submissions were made in response to Question 14 by or on behalf of professionsother than the solicitors and accountants. The Department of Agriculture commentedthat in its view the effect of the size limit is sectoral only and might be lifted inspecific instances only. The Revenue Commissioners expressed the view that shouldthe 20-partner limit be removed, it would not be removed generally but ratherremoved in the context of partnerships engaged in the provision of professionalservices. The Review Group were inclined towards accepting this view in the absenceof any compelling justification for the complete removal of the limit.

Question 15 - Are there any other issues regarding LLPs which ought to be broughtto the attention of the Company Law Review Group?

One respondent favoured the introduction of partial shield protection for allpartnerships as this would put professionals in partnerships on a similar footing to solepractitioners in terms of liability and therefore is justifiable on public policy grounds.

The Revenue Commissioners noted that the introduction of sweeping changes to legalstructures could create unforeseen opportunities for large-scale tax avoidance. Theysuggested that this point should be noted and given due consideration before anyconclusion is reached. The Revenue also commented that a safeguard similar to thatcontained in Sections 43 and 44 of the Companies (Amendment) (No. 2) Act 1999might be put in place. This might include a requirement either that the LLP providesevidence that it has a real and continuous link with an economic activity in Ireland oralternatively that a set minimum number or proportion of the partners are resident inIreland (or, perhaps, this should be amended to “resident in a member state of theEEA” to ensure compatibility with the EC Treaty and to conform with the Companies(Amendment) Act 2009).

The comment was also made that if LLPs similar to those used in the United Kingdomare introduced, there will need to be an amendment to tax legislation to facilitate

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conversion. A number of respondents suggested that the tax impact of changing froma partnership to an LLP should be neutral.

3.4 Conclusions

This consultation process elicited the views and comments of, among others, the LawSociety of Ireland and the Consultative Committee of Accountancy Bodies – Ireland,as well as of a number of accountancy firms. Veterinary Ireland and the Irish DentalAssociation also provided some comments. However, in overall terms, the processwas remarkable for the absence of any response from professions or businesses otherthan the four professions already mentioned. In the Review Group’s opinion, theresponse to the questionnaire does not suggest that there is a strong tide of opinionrunning in favour of introducing LLPs.

Perhaps it is fair to say that only the accountants and the solicitors have been trulyzealous supporters of the LLP concept. The consultation on LLPs confirms thisimpression. However, the core issue of liability and risk in Questions 1 to 5(inclusive) and Question 11 produced a set of mixed responses from within theaccountancy profession: while nearly all of these respondents were agreed that theinsurance market in Ireland is inadequate to cover the risks attendant upon unlimitedjoint and several liability of partners under current law, they were far from unanimousin their views as to how the problem should be tackled. It is apparent that someaccountancy firms support the idea of a statutory cap on liability as an alternative toLLP status, though it is unclear whether this is their preferred solution. Some otherrespondents did not refer to a statutory cap on liability at all in their submissions.Some respondents referred to the removal of the ban on incorporation of statutoryauditors but did not indicate whether this would be a viable alternative to LLPs.

The Review Group has in its 2007 Report (see chapter 5: Audit and Financial Issues)examined the issue of auditor liability in considerable depth. Under Section 200 ofthe 1963 Act statutory auditors are prohibited from exempting themselves, limitingtheir liability or obtaining an indemnity from the company whose financial statementsare being audited. The Review Group noted that Irish auditors are significantly moreexposed to the risk of “catastrophic losses” than their counterparts in other EUMember States where some form of limited liability is available. The introduction ofLLP legislation was considered, and while it was recognised that such legislationwould protect the assets of innocent partners, it was felt that it did not address thepublic policy issue of continuity of supply of audit services in the event of thecollapse of one of the major accounting firms. The Review Group recommended theremoval of the ban on incorporation of auditors and the introduction of a statutory capon auditors’ liability.

Regarding the likely impact of Section 44 of the Civil Law (MiscellaneousProvisions) Act 2008 which allows solicitors to limit their liability by contract, somerespondents argued that attempts by solicitors to limit their liability by contract willdrive their clients into the arms of other law firms which choose not to limit theirliability in this way and that this will distort the market for legal services. It was alsosuggested that Section 44 may be found to be in conflict with consumer protection

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laws. In our view it would be premature to draw any conclusions about theeffectiveness of legislation which has been in force only since 20th July 2008.

Both the accounting and legal professions are subject to a complex web of regulationand an issue such as limitation of liability may overlap with other regulatory issuesaffecting them. The Review Group feels that it is beyond its remit to give extensiveconsideration to the regulation of these professions and the public interest concernswhich would need to be addressed in proposing any changes. The Review Grouprecommends that an interdepartmental working group be established for the purposeof considering whether LLPs should be introduced as a means of enabling accountantsand solicitors to limit their liability. Such an interdepartmental group could includerepresentatives of the Department of Enterprise, Trade & Employment, theDepartment of Justice, the Company Law Review Group and the Courts Service.

The Review Group is not convinced that a case has been made for the completeremoval of the twenty-partner limit. Again, there does not appear to be a stronggroundswell of opinion favouring its removal. As has been the case hitherto, the limitcan be removed in the case of partnerships trading in certain business sectors wherethe burden of the restriction outweighs the benefits.

3.5 Recommendation

The Review Group recommends that consideration be given by the Departments ofEnterprise, Trade and Employment and Justice, Equality and Law Reform to theestablishment of an inter-departmental committee comprised of representatives ofboth Departments (including the CLRG, IAASA and the Courts Service) to considerwhether accountants and solicitors should be permitted to form LLPs or, in the case ofsolicitors and accountants, companies (the Review Group having alreadyrecommended that auditors should be permitted to incorporate) and to consider furtherthe appropriateness of a removal of the twenty-partner limit having regard to theReview Group’s view that in the absence of a compelling justification, the limitshould only be removed in the context of partnerships providing professional services.

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3.6 List of Respondents to the Questionnaire

Consultative Committee of Accountancy Bodies – Ireland

DCA Accountants & Business Advisors

Deloitte & Touche

Department of Agriculture, Fisheries and Food

Dublin Solicitors’ Bar Association

Ernst & Young

Grant Thornton

HLB Nathans

Horwath Bastow Charlton

Irish Dental Association

Irish Association of Investment Managers

KPMG

Law Society of Ireland

Office of the Director of Corporate Enforcement

OSK

PricewaterhouseCoopers

Revenue Commissioners

Russell Brennan Keane

Dr Michael Twomey

Veterinary Ireland

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Chapter 4: Modernisation Issues

4.1 Distributions And Share Capital

4.1.1 Background

At the request of the Minister for Trade and Commerce, the Company Law ReviewGroup considered in its previous Work Programme the issue of Distributions andShare Capital. This issue had been identified by various users of company law as amatter that could possibly affect Ireland’s competitiveness since there is thepossibility that transactions conducted by Irish companies may suffer a competitivedisadvantage compared with those utilising UK companies. The Review Group wasof the view in its 2007 Report that more analysis was needed before it could come to aconclusion and requested the Minister to extend that examination into its 2008/2009Work Programme.

4.1.2 Introduction

The Companies Acts reinforce the common law principle that a limited companyought not make unlawful distributions to shareholders. The Heads of the proposedCompanies Consolidation and Reform Bill with regard to distributions (Chapter 7 ofPart A3) contain substantial reforms of the law, implementing most of the provisionsproposed in the Review Group’s Second Report.

However, one further aspect of the law in relation to distributions was brought to theReview Group’s attention, relating to the assessment of the quantum of a potentialdistribution of a non-cash asset in transactions between groups of companies. It is notagreed among legal practitioners as to how the particular asset should be quantified,i.e. whether its book value or market value should be utilised.

The Irish company law rules governing distributions, are contained in Part IV of theCompanies (Amendment) Act 1983 (the “1983 Act”) which provides that a companyshall not make a distribution except out of ‘profits available for the purpose’. Thedirectors of the company making the distribution must therefore be satisfied thatsufficient distributable profits (effectively, realised profits less realised losses) areavailable to justify the making of a distribution in individual cases for the distributionto be lawful.

A distribution is defined in the 1983 Act as “every description of distribution of acompany’s assets to members of the company, whether in cash or otherwise”.

The heads of the proposed Companies Consolidation and Reform Bill (the “Bill”)with regard to distributions (Chapter 7 of Part A3) replicate substantially the rules inPart IV and also contain substantial reforms of the law in this area. One furtherspecific aspect of the law requires examination by the Review Group.

4.1.3 Capital Maintenance Rules

The rules governing “distributions” are one component of the capitalmaintenance rules.

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4.1.4 Background

Capital maintenance is one of the fundamental doctrines of company law. Thecase of Trevor v Whitworth1 is a long-standing authority for the basic principlethat at common law a company may only reduce its share capital in a mannerthat is permitted by law and is frequently cited as the clearest elucidation ofthe capital maintenance principle.

“Paid-up capital may be diminished or lost in the course of thecompany’s trading; that is a result which no legislation can prevent;but persons who deal with, and give credit to a limited company…areentitled to assume that no part of the capital which has been paid intothe coffers of the company has subsequently been paid out except in thelegitimate course of its business.”

The rationale for the capital maintenance rules is that the company’s creditorsshould be able to rely on the company’s share capital to satisfy their claims ona winding-up. Jessel MR2 summarised this rationale as follows:

“The creditor …gives credit to the company on the faith of therepresentation that the capital shall be applied only for the purposes ofthe business and he therefore has a right to say that the corporationshall keep its capital and not return it to the shareholders.”

The capital maintenance rules do not operate to preserve the value of acompany’s net assets at the level initially subscribed by shareholders – ratherthey operate to preserve a company’s share capital. However, in reality, sharecapital provides only an illusory protection – it is not what creditors seek torely on for protection or to secure their debts. The reality in Irish privatelimited companies3 is that the issued share capital may have a nominal valueof as little as €1.00.

Although the historical rationale for the capital maintenance rules was clearlycreditor protection, the rules which now come within the heading of “capitalmaintenance” may be considered to have other objectives. The rulesrestricting the payment of dividends for example could be regarded as havingthe objective of encouraging shareholders to remain invested in a company forthe long term. One commentator has gone so far as to say that “the brutaltruth is that many of the share capital maintenance rules do not offer any realprotection to creditors of limited companies but merely add to issuing andrestructuring costs.”4

1. [1887] 12 App Cas 409

2. Re Exchange Banking Company (1882) 21 Ch.D.519

3. Public limited companies are required to have a minimum issued share capital of €38,092.14by virtue of section 19 of the Companies (Amendment) Act 1983

4. Share Capital Maintenance: Current developments and future horizons David Milman, Sweet &Maxwell’s Company Law Newsletter, 28 February 2007

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4.1.5 Capital Maintenance Rules in Modern Legislation

Although the capital maintenance doctrine began by restricting share buy-backs and reduction of capital, it has given rise to a number of related rules toprevent companies from engaging in activities which could indirectly reducethe company’s capital for example, the provision by a company of financialassistance to assist in the purchase of its own shares and the prohibition on acompany paying dividends otherwise than out of profits.

The key company law provisions constituting the capital maintenance rules5

are as follows:

Prohibition on a company providing assistance in the purchase ofits own shares6;

Restrictions on redemption and purchase by a company of itsown shares7;

Capital reduction8; and

Rules relating to distributions / payment of dividends9.

These provisions are not contained in a discrete “capital maintenance rules”section of company legislation but are, rather, dispersed throughout theCompanies Acts 1963 - 2006.

The prohibition on the purchase by a company of its own shares wasintroduced in section 72 of the Companies Act, 1963 (the “1963 Act”). Thisprovision, together with those in the 1963 Act and the 1983 Act relating tocapital reduction and those introduced in the Companies Act, 1990 relating torestriction on redemption and further rules (and exceptions) regarding thepurchase by a company of its own shares, clearly relate directly to thefundamental principle of capital maintenance as set out in the original case lawin this area.Section 60 of the 1963 Act gave legislative expression to a related rule ofcapital maintenance – the prohibition on a company assisting in the purchaseof its own shares.

5. Until the introduction of the UK Companies Act 2006 the capital maintenance rules in Irelandwere broadly similar to those in the UK

6. Section 60 of the Companies Act 1963

7. Section 72 of the Companies Act 1963 and section 207 to section 211, of the Companies Act1990

8. Section 10(6), 72(2) and 205(3) of the Companies Act 1963 and section 15 of Companies(Amendment) Act 1983

9. Part IV of the Companies (Amendment) Act 1983

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Also in keeping with the basic capital maintenance principle are the rules ondistributions which were introduced in the 1983 Act. The central rationalebehind these rules is that a distribution can not be made from capital assets.The only assets which a company can distribute are those assets which roughlyaccord with the “disposable income” of an individual.10

This rule – ie that only available profits of a company may be paid out by acompany – has been highlighted as the core of the capital maintenance rules intoday’s legislation.11

4.1.6 Issues Arising

The definition of “distribution” includes more than the declaration ofdividends whether in cash or in specie by a company to its parent. The rulesrelating to distributions potentially also apply to other transactions many ofwhich are common in complex group restructurings.

In Ridge Securities Limited v IRC12, (“Ridge”) it was held that:

“a company can only lawfully deal with its assets in furtherance of itsobjects. The Corporators may take assets out of the company by wayof dividend, or with leave of the Court, by way of reduction of capital,or in a winding up. They may, of course, acquire them for fullconsideration. They cannot take assets out of the company by way ofvoluntary disposition, however described.”

Ridge was followed by Aveling Barford v Perion13 (“Aveling Barford”)which established that an intra-group transfer (to a parent or sister company)of assets at an undervalue in circumstances where the transferor does not haveany distributable profits is an unlawful distribution.

The case looked at whether a company can transfer an asset at a knownundervalue and specifically looked at a transfer of property between twocompanies in the same group at a value which was described by the judge as a“gross undervalue”. The transferor had a negative balance on the company’sprofit and loss account both before and after the transfer. The transfereesubsequently sold the assets at a large profit. The transferor then went intoliquidation and the transferor’s liquidator sued the transferee.

The court found that:

10. The Law of Private Companies, 2nd

Edition, Courtney, p. 1083

11. Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law? ESRCCentre for Business Research, University of Cambridge, December 1999

12.

(1964) 1 All ER 275

13. [1989] BCLC 626

38

the directors of the transferor had transferred the assets in breach oftheir fiduciary duties;

as the transferee knew of this breach the asset was held by thetransferee as constructive trustee; and

the breach was not ratifiable as the transfer constituted an unlawfulreturn of capital.

Hoffmann J further held that:

“the Company had at the time no distributable reserves and the salewas therefore ultra vires and incapable of validation by the approvalor ratification of the shareholder…It was the fact that it was knownand intended to be a sale at an undervalue which made it an unlawfuldistribution”.

Following Aveling Barford, it was considered by some that an intra-group saleof an asset may constitute a distribution for the purposes of section 263 of theUK Companies Act 1985 (and, in Ireland, for the purposes of Part IV of the1983 Act) if the asset concerned is sold for an amount equal to its book value,where this is less than its market value, even where the company hasdistributable reserves.

This cast doubt on the validity of intra-group asset transfers conducted byreference to book rather than market value. Such transactions are often carriedout by reference to book value rather than to market value as it can be morestraightforward from a business, administrative and/or tax perspective. Thedoubt created by Aveling Barford has resulted in such transactions beingcarried out in a more complicated way or in some instances not being carriedout at all.

Unless sufficient distributable profits are available to justify any deemed“distribution”, the transaction may constitute an unlawful distribution in thesame way as if the transaction was effected by a subsidiary in favour of itsparent company. A frequent difficulty arising in analysing such transactions isascertaining the value of the asset being transferred, particularly when there isa discrepancy between the book value and the market value of the relevantasset.

4.1.7 Book Value Versus Market Value

Irish law as currently reflected in the 1983 Act, and as proposed in the Headsof the Companies Consolidation and Reform Bill, does not address the issue asto how a disposition of a non-cash asset should be quantified.

4.1.8 Market Value

The strongest argument in support of the view that intra-group transfers ofassets should take place at market value is that by transferring an asset at bookvalue to a member where the market value is higher, a company is gratuitously

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transferring to that member the additional value inherent in the asset (which inthe company’s hands is an unrealised profit). As such, the transaction involvesa distribution of unrealised profits, in breach of section 49 of the 1983 Act.

This view is often stated to be consistent with or based on the decision inAveling Barford. Interestingly, in Aveling Barford, (which was decided byreference to common law rules on distributions and maintenance of capitalrather than the statutory rules) the transferring company did not have anyprofits available for distribution.14

This argument asserts that reference must bemade to the market value rather than to the book value since the market valuerepresents the true amount of the distribution being made.

Proponents of the market value test are particularly concerned about theprotection of creditors and argue that a book value test would facilitate acompany in dissipating its assets to the detriment of creditors or (depending onthe structure of the transaction) minority shareholders.

4.1.9 Book Value

The opposing view is essentially that the introduction of a provision similar toSection 845 of the UK Companies Act 2006 (see paragraph 5.1 below) wouldbe simply declaratory of the Irish position which has never been tested in thecourts. The argument is that a book value test is the only test which isconsistent with the whole thrust of the rules regarding distributions in Part IVof the 1983 Act, as Section 49(1) of the 1983 Act provides that the question ofwhether a distribution can be made without contravening section 45 and, if so,the amount of any such distribution, “shall be determined by reference to therelevant items as stated in the relevant accounts”. The “relevant accounts”means the audited consolidated financial statements, provided that they havebeen “properly prepared”. The “relevant items” are defined as “profits, losses,assets, liabilities, provisions…share capital and reserves”.

The argument goes that a transfer of assets at or above book value does notconstitute a distribution as the transaction would be balance-sheet neutral(provided that the company has, at the relevant date, positive distributablereserves).

There is no requirement in law or in accounting standards to revalue assets atmarket value in order to give a true and fair view of a company's assets andliabilities. The principal reason for the preparation of audited accounts is toenable the members and creditors to receive assurances as to the financial stateof a company.

4.1.10 Creditor Protection Issues

14. Hoffman J in Aveling Barford concentrated on the market value of the relevant asset and didnot examine the book value of the asset. The main decisions relied on by Hoffman were Ridgeand Re Halt Garages (both involved a comparison of the market value of the asset or benefitwhich had been transferred with the actual value at which it had been transferred). Neitherreferred to the concept of book value

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The principal concern in relation to the introduction of a book value testrelates to creditor protection. It is worth noting however, that even if a bookvalue test were introduced a transaction which might otherwise constitute adistribution will still be subject to analysis pursuant to the common law ruleson unlawful return of capital. Broadly, this rule prevents a company passingassets to shareholders except where to do so would leave the company withassets whose value equals or exceeds the aggregate of its liabilities (includingcurrent liabilities) and its share capital and undistributable reserves. Putanother way, the rule requires that the value of a transferor’s net assets mustequal or exceed its share capital and undistributable reserves after the transfer.The legal consequences of an unlawful return of capital are severe. Thetransfer would be ultra vires and void and could not be validated byshareholder approval or ratification.

It is also worth noting that if a book value test were adopted, it would beconditional on any transaction being analysed under the “Distribution” head,only being permitted to avail of the book value test if the relevant companyhas positive distributable reserves. Creditor protection concerns will be lessacute in respect of a company which has positive distributable reserves than inrespect of a company in a distressed financial situation.

4.1.11 What if Market Value is less than Book Value

It is consistent with the arguments in support of the book value test, that if themarket value of an asset is less than the book value, the disposition of thatasset to a shareholder (for example) at less than book value would constitute adistribution. The creditor protection arguments would also support thatanalysis as, if the creditors are relying on the accounts of a company to assessits creditworthiness, then in the absence of any accounting treatment whichwould permit the company to depreciate the value of the relevant asset, itwould be detrimental to the creditors to permit the company to dispose of theasset to a shareholder at less than its book value, unless the company hadsufficient distributable reserves to make up the difference.

4.1.12 Quantification Of Potential “Distributions” In Other Jurisdictions

How is the potential distribution of an asset treated in other jurisdictions?

4.1.13 United Kingdom

The question has long been a matter of debate in the UK, particularly since thedecision in Aveling Barford. The issue was examined by the UK CompanyLaw Review (“UK CLR”) in its June 2000 review of “Modern Company Lawfor a Competitive Economy”. The UK CLR noted that the Aveling Barforddecision did not decide anything about the situation where a company haspositive distributable reserves, but noted that there was a body of opinion,prompted by the decision, that an intra-group sale of an asset may constitute adistribution for the purposes of section 263 of the UK Companies Act 1985 ifthe asset concerned is sold for an amount equal to its book value, where this isless than its market value, even where the company has distributable reserves.It noted:

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“The result of Aveling Barford and the debate it hasengendered have cast doubt on the validity of intra-groupasset transfers conducted by reference to book value ratherthan by reference to market value. It is understood thatsuch transactions are often carried out by reference to bookvalue rather than to market value for a variety of business,administrative or tax reasons. Because of this doubt suchtransactions are therefore commonly carried out in a morecomplicated way (often involving revaluation of the assetconcerned and then its sale/distribution, relying on section276, which provides that a distribution in kind of an assetcarrying an unrealised profit is to be treated as arealisation of the profit) or do not proceed at all.”

The UK CLR put forward proposals to clarify the uncertainty and doubt. TheUK Government White Paper of March 2005 agreed that Aveling Barford(which was decided by reference to common law rules on distributions andmaintenance of capital rather than the statutory rules) was widely consideredto have cast doubt on the validity of intra-group asset transfers conducted byreference to book value rather than by reference to market value. It proposedan amendment to the UK statutory rules to “make clear that where thetransferring company has distributable profits, its assets can be transferred atbook value. This will remove any uncertainty about the current law, and alsoavoid the need for companies to carry out complex asset revaluationsrequiring significant professional advice and fees to advisors.”That proposal was duly adopted and Section 845 of the UK Companies Act2006 (“Section 845”) provides:

“845 Distributions in Kind: Determination of Amount1. This section applies for determining the amount of a distribution

consisting of or including, or treated as arising in consequence of, thesale, transfer or other disposition by a company of a non-cash assetwhere:

(b) at the time of the distribution the company has profits availablefor distribution, and

(c) if the amount of the distribution were to be determined inaccordance with this section, the company could make thedistribution without contravening this Part.

2. The amount of the distribution (or the relevant part of it) is taken tobe:

(b) in a case where the amount or value of the consideration for thedisposition is not less than the book value of the asset, zero;

(c) in any other case, the amount by which the book value of theasset exceeds the amount or value of any consideration for thedisposition.

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3. For the purposes of sub-section (1)(a) the company’s profitsavailable for distribution are treated as increased by the amount (ifany) by which the amount or value of any consideration for thedisposition exceeds the book value of the asset.

4. In this section “book value”, in relation to an asset, means:

(b) the amount at which the asset is stated in the relevant account,or

(c) where the asset is not stated in those accounts at any amount,zero.

5. The provisions of Chapter 2 (justification of distribution by referenceto accounts) have effect subject to this section.”

4.1.14 New Zealand

The relevant legislation on distributions in New Zealand is the Companies Act1993 (the “NZ Act”).

Section 52(1) provides that if the board of a company is satisfied onreasonable grounds that the company will immediately after the distribution,satisfy the solvency test (defined in section 4 of the NZ Act) it may authorise adistribution by the company at a time and of an amount and to anyshareholders it sees fit. The directors must sign a certificate stating that, intheir opinion the company will, immediately after the distribution, satisfy thesolvency test.

In considering whether the company will satisfy the solvency test (i.e. will bein a position to pay its debts as they fall due (cash-flow test) and the value ofits assets exceed its liabilities (balance-sheet test) regard must be had to thecompany’s most recent financial statements and all other circumstances whichthe directors knew or ought to have known that affect, or might affect thevalue of the company’s assets and liabilities.

Distribution is broadly defined to include:

The direct or indirect transfer of money or property, other than thecompany’s own shares, to or for the benefit of the shareholder; or

The incurring of a debt to or for the benefit of the shareholder — inrelation to shares held by that shareholder, and whether by means of apurchase of property, the redemption or other acquisition of shares, adistribution of indebtedness, or by some other means.

4.1.15 Australia

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Section 254T of the Corporations Act 2001 (the “Corporations Act”)provides that a company can only pay dividends out of profits. Section 254Uof the Corporations Act provides that the directors of a company maydetermine that a dividend is payable and fix the amount, time and method ofpayment. Methods of payment may include the payment of cash, the issue ofshares, the grant of options and the transfer of assets.

The issue is currently under review in Australia. The Australian AccountingStandards Board (“AASB”) has called for reform of the rules relating topayment of dividends, either by restating the capital maintenance principle inmodern terms as in the UK, or by adopting a solvency test as in New Zealand.The Australian Legislation Review Board also recommended15 the adoption ofa solvency test for payment of dividends rather than the existing “profits” andsolvency formulation. However, this recommendation has not to date beenimplemented.

4.1.16 Canada

The relevant legislation on distributions in Canada is the Canada BusinessCorporations Act (the “Canadian Act”) which provides that a company maynot declare or pay a dividend if there are reasonable grounds for believing that:

the company is, or would after the payment be, unable to pay itsliabilities as they become due; or

the realisable value of the company’s assets would thereby be less thanthe aggregate of its liabilities and stated capital of all classes.

Under section 43 of the Canadian Act, a company may pay a dividend byissuing fully paid shares of the company and may pay a dividend in money orin property.

4.1.17 Isle of Man

The relevant legislation on distributions in the Isle of Man is the CompaniesAct 2006. The approach taken is broadly similar to that taken in the NZ Act.Directors of a company are permitted to authorise a distribution by thecompany to its members at such time and of such amount as they think fit ifthey are satisfied, on reasonable grounds, that the company will, immediatelyafter the distribution, satisfy the solvency test.

A distribution is defined as a transfer of any company asset to any member orthe incurring of a debt by the company to or for the benefit of any member,which includes the payment of dividends, the redemption of shares or apurchase of own shares.

15. “Payment of dividends under the Corporations Act 2001” (December 2002 discussion paper)

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A company satisfies the “solvency test” if:

it is able to pay its debts as they become due in the normal course of itsbusiness; and

the value of its assets exceeds the value of its liabilities.

If a company can pass the solvency test immediately after a distribution hasbeen made, then the directors can make a distribution without the need for aformal members’ resolution, unless a company’s memorandum of associationor articles of association specifically provide otherwise.

Should a company not pass the solvency test immediately after a distributionhas been made to a member, such a distribution may be recovered from themember provided certain conditions are met. If the member received thedistribution other than in good faith and the member’s position has not beenaltered by relying on the distribution and it would not prejudice the member torecover the payment in full, then such distribution shall be recoverable.

When a director fails to take reasonable steps to ensure that the company cansatisfy the solvency test prior to making a distribution, such director shall bepersonally liable to the company for any such distribution that cannot berecovered from the members.

If a court considers that a company would have satisfied the solvency test bymaking a lesser distribution, then the court can authorise such lesserdistribution or relieve the director of the personal liability equivalent to suchlesser distribution.

Consequences Of Making An Unlawful Distribution

4.1.18 Repayment or Return of Asset

Section 50 of the 1983 Companies Act provides that a shareholder whoreceives a distribution in circumstances where he knows or should reasonablyknow that the distribution is unlawful is obliged to repay such distribution tothe company. In the case of a distribution in specie, the recipient of thedividend will be obliged to repay to the company a sum equal to the value ofthe distribution. It is proposed that this Section will be re-enacted, withoutamendment, in Head 52, Part A3 of the General Scheme of the CompaniesConsolidation and Reform Bill.

4.1.19 Constructive Trustee

Liability to repay a distribution as a constructive trustee may also arise atcommon law where (i) the recipient has knowledge of the facts or (ii) wherethe monies are traceable. There is UK case law to indicate that commondirectorships between transferring companies could be sufficient for thisknowledge test for the purpose of imparting the transferring company’sknowledge to the recipient company.

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4.1.20 Directors’ Liability

In the event that an unlawful distribution is made by a company, in theabsence of shareholder ratification of the breach of their duty16, the directorsmay also be liable for breach of fiduciary duty on the basis that they will havemisapplied the company’s funds and/or assets. If the company is insolvent, orbecomes so as a result of the transaction, ratification may not help the directorsas at that stage their primary duty is to consider creditors’ interests.

A director must be conscious of his obligation to act in the best interests of thecompany of which he is a director. There must therefore be a legitimate reasonfor the transfer from the perspective of the transferor company – it should notbe motivated by an intention to make a distribution. Each company in a groupmust be treated as a separate legal entity and the directors of a particularcompany are not entitled to sacrifice the interests of that company for those ofanother group company17.

Furthermore, there is UK case law to support the proposition that directors of acompany who cause a company to effect a distribution contrary to statute areaccountable to the company for such unlawful payment.18

4.1.21 Section 139 of the Companies Act 1990

In situations where the company is insolvent, section 139 of the 1963 Act(“Section 139”) may be of particular relevance. Section 139 provides that:

1. “Where, on the application of a liquidator, creditor or contributory of acompany which is being wound up, it can be shown to the satisfaction ofthe court that:

a) any property of the company of any kind whatsoever wasdisposed of either by way of conveyance, transfer,mortgage, security, loan, or in any way whatsoeverwhether by act or omission, direct or indirect, and

b) the effect of such disposal was to perpetrate a fraud on thecompany, its creditors or members,

the court may, if it deems it just and equitable to do so, order any personwho appears to have the use, control or possession of such property or theproceeds of the sale or development thereof to deliver it or pay a sum inrespect of it to the liquidator on such terms or conditions as the court seesfit.

16. Shareholder ratification would only be effective in relation to the directors’ breach. If thetransaction involves an unlawful return of capital or an unlawful distribution it will be ultra viresthe company itself and the shareholders will be unable to ratify it.

17. This principle was established in the case of Charterbridge Corporation v Lloyds Bank Limited[1970] Ch 62

18. Bairstow v Queen’s Moat Houses plc [2000] 1 BCLC 549

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2. Subsection (1) shall not apply to any conveyance, mortgage, delivery ofgoods, payment, execution or other act relating to property made ordone by or against a company to which Section 286(1) of the PrincipalAct19 applies.

3. In deciding whether it is just and equitable to make an order under thissection, the court shall have regard to the rights of persons who havebona fide and for value acquired an interest in the property the subjectof the application.”

In order to set aside a disposition of assets pursuant to Section 139, theliquidator does not have to prove that the company intended to defraud itscreditors. Rather he has the lower evidential burden of merely establishingthat the effect of the disposition has been to defraud the creditors. Thissection was recently considered in the case of Le Chatelaine Thudicum Ltd (involuntary liquidation) v Conway.20 Murphy J. noted that it is apparent from theterms of this provision that, before it can make an order under Section 139, thecourt must be satisfied that all three of the following criteria are met:

there was a disposition;

of company property; and

the effect of the disposition was to perpetrate a fraud either on thecompany, its creditors or its members.

He also observed that the section is drafted in very broad terms so as toencompass almost any kind of transaction.

Although Section 139 has not to date been relied upon to effect the return ofan asset which was unlawfully distributed, it is submitted that this is preciselythe type of situation in which Section 139 might be invoked.

Related Provisions – General Scheme of the Companies Consolidation & ReformBill

4.1.22 Share for Undertaking Transactions

Head 24, Part A3 of the General Scheme of the Companies Consolidation &Reform Bill (the General Scheme) (Variation of company capital onreorganisations) is new and provides as follows:

1. “Subject to Subhead (2) a company may dispose of an asset, anundertaking or part of an undertaking or a combination of assets andliabilities to a body corporate, on terms that the consideration

19. Fraudulent preference provisions

20. [2008] IEHC 349

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therefore, being shares or other securities of such body corporate, areallotted to the members of the company or of its holding companyrather than to the company (and whether with or without the paymentof any cash to such members or the company).

2. A transaction to which Subhead (1) applies must be:

(a) approved by the company by the validation procedure; or

(b) by special resolution confirmed by the court under Head 18 ofthis Part.

4. The company capital shall be deemed reduced by the book value of thedisposed asset, undertaking or part of an undertaking as aforesaid.

5. The transaction shall take effect upon delivery for registration ofparticulars of the validation procedure or the confirmed specialresolution in the prescribed form to the Registrar.

6. Any transaction in breach of this head shall be voidable at the instanceof the company against any person (whether a party to the transactionor not) who had actual or imputed notice of the facts which constitutesuch breach.”

The explanatory note to this Head provides: “This head is new. The headimplements Recommendation 7.11.9 of the Second Report of the CLRG andenables the company to vary its capital on re-organisation. The head permitsa company to enter into a transaction to dispose of assets, undertakings orliabilities, or a combination thereof, to a body corporate in return for sharesor securities being allotted to the members of the company as consideration.Such transactions are only given effect following the approval by the companyunder the validation procedure in Part A4 or by special resolution passed,confirmed by the court.”

The facility introduced by this head is a form of distribution and the amount ofthe distribution is assessed by reference to the book value of the asset beingtransferred.

4.1.23 Revaluation of Assets

Head 53(6) of Part 3 of the General Scheme is a new provision which is not inthe 1983 Act. It is based on section 276 of the UK Companies Act 1985 andprovides that where a company makes a distribution of a non-cash asset, anunrealised profit thereon can in effect be treated as realised profit for thepurpose of determining the lawfulness of the distribution.

If a provision similar to section 845 is not included in the General Scheme,there will be an inconsistency with this provision, which will be relativelyeasily (albeit expensively) circumvented in situations where a company withlimited distributable reserves wishing to transfer an asset at book value to arelated company could have the property re-valued, and the uplift in valuetreated as realised instantaneously at the moment of the distribution, and thus

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used legitimately by being taken into account for determining whether there issufficient “cover” within the distributable reserves for the transaction.

4.1.24 Recommendation

In many transactions with an international scope, there was, until thecommencement of Section 845 of the UK Companies Act 2006 a level ofunderstanding of the Irish position on this issue given that it was so closelyaligned with that pertaining in the UK (albeit there is currently no statutoryequivalent to section 276 of the UK Companies Act 1985). However, there isnow no doubt that transactions conducted by Irish companies suffer asignificant competitive disadvantage compared to those utilising UKcompanies.

The arguments in support of an amendment to the statutory rules put forwardby the UK CLR in 2000 are equally applicable in Ireland today. The ReviewGroup accepts that:

there is currently a lacuna in the law relating to distributions whichmust be addressed – essentially the decision to be made is whether abook value test or market value test is appropriate in the circumstances;

the rules in relation to distributions currently reflected in Part IV of the1983 Act are determined by reference to the books of account of therelevant company. It is a logical extension of these rules to providethat a book value test should also be applied to the evaluation valuationof transactions involving non-cash assets between companies and theirshareholders. Conversely if a market value test were provided for, thisaspect of the rules governing distributions would be inconsistent withall other aspects of those rules currently contained in Part IV of the1983 Act;

the introduction of a book value test in relation to these types oftransactions would be consistent with the previous recommendations ofthe Group and reflected in the General Scheme, mentioned inparagraph 4.1.22 above; and

the strongest argument militating against a book value test, that ofcreditor protection, will be addressed if a book value valuation of non-cash assets is applicable only in circumstances where the relevantcompany has positive distributable reserves.

The Review Group recommends the introduction of a provision into Irish lawequivalent to Section 845 of the UK Companies Act 2006.

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Chapter 4: Modernisation Issues

4.2 Extension of the audit exemption regime to small companies limited byguarantee

4.2.1 IntroductionPublic companies limited by guarantee (CLGs) must in all circumstances have theiraccounts audited and they cannot avail of the audit exemption for private companieswhich satisfy certain conditions.

4.2.2 Companies Limited by GuaranteeThe CLG is a type of company used primarily as a vehicle for non-profitorganisations that require legal personality and facilitate structured governance, suchas charities, residential management companies, sports clubs, trade associations andcommunity or special interest groups. Although private companies limited byguarantee must have a share capital, since the enactment of the Companies(Amendment) Act 1983, a CLG cannot have a share capital or shareholders, butinstead has members who act will act as guarantors. Every member gives anundertaking in the memorandum of association to contribute a specified amount(usually not more than €1.00) to the assets of the CLG in the event of it being woundup.

As one commentator has observed21—

“A company limited by guarantee is a suitable vehicle for a wide rangeof activities. Charities which are to have a corporate form must becompanies limited by guarantee and must prevent the distribution ofprofit to their members, as must registered social landlords or housingassociations.22 Companies limited by guarantee are also frequentlyused for the not-for-profit promotion of education, commerce, art,science or sport, or for promoting the interests of a particular section ofsociety or a particular policy. They may also be used for managingsemi-governmental and regulatory functions, including where a formergovernmental or local authority function has been privatised.23

A substantial number of companies limited by guarantee are propertymanagement companies, set up to manage blocks of flats or estatedevelopments. Mutual assurance companies may be formed ascompanies limited by guarantee, as may both members’ clubs and

21West, Companies Limited by Guarantee (Second Edition, Jordan Publishing Limited, 2004) at section

1.1.

22A CRO Search discloses more than 300 companies, most of them guarantee companies, that include

the words “Housing Association” in their name.

23Examples of such companies in the Irish context would include (i) The Irish Auditing and Accounting

Supervisory Authority (which is a company limited by guarantee, under Section 5 of the 2003Act); (ii) The Investor Compensation Company Limited, established under Section 10 of theInvestor Compensation Act 1998; (iii) The Irish Takeover Panel, established under Section 3of the Irish Takeover Panel Act 1997; and (iv) County Enterprise Boards, established underSection 10 of the Industrial Development Act 1995.

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proprietary clubs, the latter being a type of club where the owner of abusiness forms a club for its customers. Finally, clubs of traders andother companies may form themselves into a trade association withcorporate form.”24

While many companies limited by guarantee operate with comparatively smallturnover or assets, some are very considerable in scale.25

4.2.3 The Audit RequirementThe basic position in Irish law is that every company must appoint an auditor26 andhave its annual accounts audited27. A statutory auditor performs an audit inaccordance with International Standards on Auditing (ISA) (UK and Ireland) as issuedby the Auditing Practices Board (APB). The auditors must make a report to themembers on the accounts examined by them and on every balance sheet and profitand loss account laid before the company in general meeting during their tenure ofoffice. The auditors’ report must state whether the annual accounts give a true andfair view in accordance with the relevant financial reporting framework of the state ofaffairs of the company as at the end of the financial year and of the profits or loss ofthe company for the financial year.

4.2.4 Audit ExemptionPrivate companies which satisfy certain conditions can be exempted from therequirement to have an auditor and to have their annual accounts audited.28 To availof the exemption, the directors of the company must form the opinion that in respectof both the financial year in question and the immediately preceding financial year,the company satisfies the following conditions:-

(i) the company is a company to which the 1986 Act applies,(ii) the amount of the turnover of the company does not exceed €7.3

million,(iii) the balance sheet total of the company does not exceed €3.65 million,(iv) the average number of persons employed by the company does not

exceed 50,(v) the company is not a parent undertaking or a subsidiary undertaking,

and(vi) the company is not a licensed bank, an insurance undertaking or a

financial services company of the kind referred to in the SecondSchedule of the 1999 (No2) Act. A company is not entitled to the

24A CRO Search discloses companies limited by guarantee such as The Irish Association of Pension

Funds (CRO 94448) and the Irish Association of Investment Managers (CRO 193905).

25For example the accounts as filed in the CRO of a company limited by guarantee which operates in

the healthcare sector, indicate that its income in the year ending 31 December 2008 was inexcess of €203m.

26Section 160(1) of the 1963 Act.

27Section 193(1) of the 1990 Act. See also Sections 157 and 159 of the 1963 Act.

28The audit exemption regime was introduced in Part III of the 1999 (No. 2) Act.

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exemption in a financial year unless the company is up-to-date in thefiling of its annual returns with the CRO.29

The audit exemption regime is subject to an important safeguard. Members holdingshares in the company that confer not less than one tenth of the total voting rights inthe company may serve a notice in writing on the company stating they do not wishthe exemption to be available to the company in the financial year in question.30

CLGs cannot avail of audit exemption because they are not private companies.Moreover, in the Companies Consolidation and Reform Bill, private companieslimited by guarantee will fall within the designated activity company category (DAC)and as such will be able to avail of the audit exemption subject to compliance with therelevant requirements and obligations.

Many CLGs are also excluded from the audit exemption regime in another way, asthey fail to satisfy the condition that they must be companies to which the 1986 Actapplies. Any company which is not “trading for the acquisition of gain by [its]members”31 falls outside the scope of the 1986 Act.32

4.2.5 UK LegislationIn the UK, companies, including CLGs, which qualify as small companies can ingeneral avail of audit exemption.33 The legislation excludes from audit exemptionpublic companies, certain financial services companies and certain trade unions andrepresentative associations.34 Non-profit-making companies whose accounts aresubject to public sector audit rules are also excluded.35 Companies limited byguarantee and not having a share capital are not considered to be public companies inthe UK36 and are not per se excluded from the right to avail of audit exemption.

The members of a company which would otherwise be entitled to audit exemptionmay, by notice, require it to obtain an audit of its accounts for a financial year. Thenotice must be given by (a) members representing not less than 10% in nominal valueof the company’s issued share capital, or any class of it, or (b) if the company does

29Section 32(1) and (3) of the 1999 (No. 2) Act.

30Section 33(1) of the 1999 (No. 2) Act as substituted by Section 9(1)(d)(i) of the 2006 Act.

31Section 2(1) of the 1986 Act.

32The ODCE at page 156 of its Company Law Handbook on Residential Property Owners’ Management

Companies (2008) expresses the view that property management companies probably comewithin the scope of the 1986 Act having regard to the meaning of “gain” as found by theSupreme Court in Deane v. Voluntary Health Insurance Board [1992] 2 I.R. 319 – where theterm was held not be synonymous with commercial profits.

33Section 477 of the Companies Act 2006.

34Section 478 of the Companies Act 2006.

35Section 482 of the Companies Act 2006.

36They do not come within the definition of “public company” in Section 4(2) of the Companies Act

2006.

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not have a share capital, not less than 10% in number of the members of thecompany.37 This is slightly different from the 10% threshold in our 1999 (No. 2) Actwhich refers to members holding one tenth of the voting rights in the company.

4.2.6 The case for extending audit exemption to CLGs

More than ever, in a difficult economic environment, it is important that theregulatory burden does not fall disproportionately. It is argued that CLGs which meetthe statutory exemption criteria should be allowed to opt out of audit unless an audit isspecifically requested by their members, in the same way as a company limited byshares.

External audit is only one possible way of providing external assurance in relation tothe financial information of companies. Alternative forms of assurance carried out inaccordance with formal internationally accepted norms may be provided by auditors(or external accountants) and, while not being a full statutory audit in accordance withISAs (UK and Ireland), may fulfil the needs of company members and the publicinterest. Such assurance/external reporting options include:

- a “review engagement” carried out in accordance with International Standardon Review Engagements 2400 (ISRE 2400) issued by the IAASB(International Auditing and Assurance Standards Board). The objective ofsuch an assignment is to enable the auditor (or external accountant) to statewhether, based on certain procedures carried out, anything has come to hisattention that causes him to believe that the financial statements are notprepared, in all material respects, in accordance with an identified financialreporting framework, for example Financial Reporting Standards issued by theAccounting Standards Board and promulgated for application in Ireland by theInstitute of Chartered Accountants in Ireland.

- an “assurance engagement” carried out in accordance with InternationalStandards on Assurance Engagement (ISAEs) issued by the IAASB. ISAEsestablish basic principles and essential procedures for, and provide guidanceto, accountants for the performance of assurance engagements other thanaudits or reviews of historical financial information. The level of assurance tobe provided is agreed prior to the commencement of the engagement.

- an “agreed-upon-procedures” engagement carried out in accordance withInternational Standards on Related Services (ISRSs) issued by the IAASB.According to ISRS 4400

“The objective of an agreed-upon-procedures engagement is for the auditor tocarry out procedures of an audit nature to which the auditor and the entity andany appropriate third party have agreed and to report factual findings. As theauditor simply provides a report of factual findings no assurance is expressed.Instead, users of the report assess for themselves the procedures and findingsreported by the auditor and draw their own conclusions from the auditor’s work.The report is restricted to parties that have agreed to the procedures to be

37Section 476 of the Companies Act 2006.

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performed since others, unaware of the reasons for the procedures, maymisinterpret the results.”

An engagement to perform agreed-upon-procedures may involve the auditor inperforming certain procedures concerning individual items of financial data, afinancial statement such as a balance sheet or even a complete set of financialstatements. For example in the case of a property management company , memberscould engage an auditor to carry out an agreed-upon-procedures engagement inrelation to the expenses incurred by the management company on their behalf or inrelation to the calculation by the management company of the management charge tobe paid by members. Such an engagement may more directly address the concerns ofthe members of the property management company than a full statutory audit. Indeedit is already common in practice for the statutory auditor of a property managementcompany to be separately engaged as reporting accountant in relation to servicecharge calculations. The Institute of Chartered Accountants In England and Waleshas published a technical release38 dealing specifically with accountant’s reports onservice charge accounts which forms a useful basis for agreed-upon-proceduresengagements in relation to property management company service charges.

It can be argued that the above options can provide a cost-efficient alternative to thestatutory audit which meets the key needs of members. To extend the possibility ofaudit exemption to public companies limited by guarantee would provide thenecessary flexibility for members to choose whether a statutory audit or some otherform of external assurance is appropriate to their information needs.

While it may be argued that audited financial statements are necessary for the benefitof third parties and that therefore there is little merit in extending audit exemption, itshould be noted that the auditor’s report on financial statements is addressed to themembers of the company only and is not intended to be for the benefit of third partiessuch as bankers or donors. In general interested third parties can seek access tofinancial data from the company to inform their decisions. For example bankers canrequest detailed information from a company in relation to loan covenants when theyrequire it.

4.2.7 The case against extending audit exemption to CLGs

Audit exemption when introduced in 1999 was aimed at relieving the small businessowner from the onus of obtaining an audit which provides reassurance to theshareholders that the directors are presenting a faithful record of the company’sfinancial performance and position. In most small companies the shareholders anddirectors are one and the same. In effect audit exemption removed for very smallcompanies a self-reporting requirement on issues that had very little if any widerimpact in an environment where most other interested parties - for example, banks -had their own powers and sources of relevant financial information in any event.

38Technical Release 03/07 “The Accountant’s Report on Service Charge Accounts Prepared in

Accordance with Regulations Made Under the Common hold and Leasehold Reform Act 2002”published by the Institute of Chartered Accountants in England and Wales.

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Audit exemption has always been restricted to non-public companies, and those whooppose extending the audit exemption regime maintain that this is justified asmembers of public companies need the independent professional opinion of an auditorto protect them in what would otherwise be a relatively weak position vis-à-vis thedirectors.

It has been suggested that the classification of CLGs as public companies representssomething of an anomaly. Most CLGs are very small, and would comfortably meetthe financial conditions applicable to private companies in terms of qualifying foraudit exemption. However this argument overlooks some important features of CLGs.

In practice these entities have become the main legal structure supporting a plethoraof “not-for-profit”, voluntary, community and other enterprises. Typically theseinclude local community development enterprises, community support activities(funded crèches, community halls, small business supports, etc.), charitableorganisations, sports clubs, as well as more recently a large number of residentialproperty management companies.

Those who express reservations to permitting CLGs avail of audit exemption do so onthe grounds that the directors of some CLGs will not have much experience inmanaging companies and the members are often unclear as to the role of members inholding directors to account. Many CLGs manage relatively large budgets at theupper end of the current audit exemption threshold for private companies. Thefunding for CLGs can come from EU or State agencies, which tend in practice torequire an audit report, thus overriding any exemption which might be available inlaw, but money can also come from community drives and voluntary sources, with anenhanced need for transparency and accountability.

Such companies may also have a much wider membership (not in the legal sense ofthat term), made up of individuals who have an interest in and in many cases mayhave contributed, in cash or through their own labour, to the operation of thecompany. This wider involvement and interest means that persons who may have nocompany law rights may in practice have a considerable interest in the performance ofthe directors in running the enterprise.

These factors can support the need for CLGs to obtain an independent professionalopinion as to the whether the accounts give a true and fair view of the activities andstate of affairs of the company. The audit plays an enhanced role in organisationswhere funding is disparate, where those charged with governance may not necessarilypossess the particular skill sets which are needed to ensure that funds are utilised in aresponsible manner, where the responsibility of the board may be in practice to amuch wider constituency than just the members of the company, and where theimpact of any accounting failure by the company can be felt not just by the membersbut also through the wider community.

4.2.8 The Review Group’s opinion

The Review Group is mindful that the widening of the audit exemption should not beundertaken if it might lead to lower standards of accountability, accuracy andtransparency in the preparation of annual accounts or create a public perception that

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lower standards are permissible. The Review Group believes, however, that any suchconcerns can be addressed in a proportionate and measured exemption. Firstly, itshould be noted that the Review Group did not consider any changes to the financialreporting framework (formats and accounting standards as prescribed by theCompanies Acts) for CLGs. Secondly, the Review Group is of the view that there aremany cases where the burden, in terms of cost and management time, of complyingwith audit requirements for small CLGs outweighs any benefit in terms of protectingthe public interest, if that interest is indeed intended to be protected or is in factprotected by the Companies Acts requirement that CLGs be audited. Thirdly, theReview Group believes that the turnover and balance sheet thresholds applicable inthe case of private limited company companies (€7.3 million and €3.65 millionrespectively) should be applicable, but additional safeguards are necessary in order toprotect members’ rights to seek an audit where they believe it is warranted. Finally,the Review Group is persuaded that alternative forms of external assurance may besuitable in given circumstances39 and that people who require the assurance of anindependent audit (e.g. State bodies or banks who deal with CLGS) may continue torequire an audit as a term of engaging with a particular CLG.

The Review Group feels there is merit in extending the audit exemption regime toCLGs and in applying it on a similar basis to private companies, so that the Ministerwould fix the exemption threshold below which CLGs can avail of the exemption.The effect of this would be that if the directors of the CLG are of the opinion that thecompany will satisfy the numerical conditions which relate to turnover, balance sheettotal and number of persons employed in the relevant financial year, and providedalso that the numerical conditions are satisfied in the preceding financial year, thenthe requirement to have the audited accounts of the company audited will not apply inthe relevant financial year. However, any one member who has the right to vote atgeneral meetings of the CLG may veto the proposal to avail of the audit exemption.

For reasons which are explained below, charities should be subject to slightlydifferent audit exemption rules.

4.2.9 Charities which are CLGs

CLGs which are formed for charitable purposes are now subject to the provisions ofthe Charities Act 2009. Part 3 of that Act deals with the regulation of charitableorganisations. The legislation provides that the accounts of a charitable organisationshall be audited if the gross income or total expenditure of the charitable organisationin the relevant financial year or either of the two financial years preceding it exceedssuch amount as may be prescribed by order of the Minister for Community, Equalityand Gaeltacht Affairs. However, these provisions do not apply to charitableorganisations that are companies to which the Companies Acts apply. The CharitiesAct 2009 does not regulate the auditing of companies that are charitable organisationsnor give them any right to apply for audit exemption. Subject to consultation betweenthe Department if Enterprise, Trade and Employment with the Department of

39The ODCE at page 164 of its Company Law Handbook on Residential Property Owners’ Management

Companies (2008) supports the view that management companies might find other forms ofexternal reporting suitable for their needs.

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Community, Equality and Gaeltacht Affairs and the charities regulator, the ReviewGroup recommends that the audit exemption regime contained in Part III of the 1999(No. 2) Act be extended to such class or classes of CLG which are charitableorganisations (within the meaning of the Charities Act 2009) to the maximum extentto which a charitable organisation that is not a company may elect not have itsfinancial statements audited. If 10% of the members who have voting rights decidethat an audit should be conducted, they should be able to require the directors of theCLG to have the CLG’s financial statements audited notwithstanding that it wouldotherwise be eligible to exemption.

4.2.10 CLGs formed for other purposes

As noted above, we propose that the audit exemption provisions in Part III of the 1999(No. 2) Act should be extended to CLGs. The effect of this would be that if thedirectors of the CLG are of the opinion that the company will satisfy the numericalconditions which relate to turnover, balance sheet total and number of personsemployed in the relevant financial year, and provided also that the numericalconditions are satisfied in the preceding financial year, then the requirement to havethe audited accounts of the company audited will not apply in the relevant financialyear. However, any one member of the CLG with voting rights should have the rightto veto the proposal to avail of the audit exemption.

The Review Group considered that it was not appropriate to making specificrecommendations in the case of CLGs used as management companies in apartmentdevelopments because such related to the activities that particular company typesengage in whereas the Review Group is concerned with the law relating to the entitythat is the company. The Review Group has no expertise in relation to the regulationof property management companies.

The Review Group recommend as an additional safeguard that a proposal to avail ofaudit exemption, in respect of the next ensuing financial year of the CLG, shall be astanding item on the agenda at each annual general meeting.

The Review Group considered making it a criminal offence where directors refused toact on foot of a member’s veto but considered this unnecessary since in suchcircumstances, the right to audit exemption falls away and in such a company thefailure to file an auditors’ report with the company’s financials would in itself be anoffence.

4.2.11 Conclusions and Recommendations

In summary, the Review Group recommends that:-

(i) Subject in each case to consultation with the Minister for Community, Ruraland Gaeltacht Affairs and the charities regulator, the audit exemption regimecontained in Part III of the 1999 (No. 2) Act be extended to such class orclasses of CLG which are charitable organisations (within the meaning of theCharities Act 2009) so as to bring them into alignment with charitable

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organisation organisations that are not companies provided that 10% of themembers with voting rights should be able to require an audit.

(ii) The audit exemption regime contained in Part III of the 1999 (No. 2) Act beextended to all CLGs which are not charitable organisations, subject to a vetoright, any one member of the company, and further subject to the requirementthat audit exemption in respect of the following year, shall be an item on theagenda of the annual general meeting.

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Chapter 4 Modernisation Issues

4.3 Further consider the extension of the audit exemption regime to dormantsubsidiaries.

4.3.1 Background

The Minister for Trade and Commerce asked the Review Group to consider thismatter in its 2007 Work Programme in the light of the fact that the UK had introducedlegislation that allowed dormant companies to avail of audit exemption. Since theterm “dormant” is not a defined phrase in Irish company law, the Review Groupbelieved that it would need more data and analysis on the scale of dormant companiesin Ireland, their purpose and activities, as well as a satisfactory definition, before itcould recommend that they could avail of audit exemption. The Group requested theMinister to extend that examination into its 2008/2009 Work Programme.

4.3.2 Legal background

The current law is that neither parent companies nor subsidiary companies can availof the audit exemption. Section 32(3)(v)(I) of the Companies (Amendment) (No.2)Act 1999 excludes the application of the exemption to:

“ a parent undertaking or a subsidiary undertaking (within the meaning of theEuropean Communities (Companies: Group Accounts) Regulations, 1992 (S.I. No.201 of 1992))”

4.3.3 Issues arising

The term “dormant” is not a defined phrase in company law. However, the generallaw on audit exemption allows a stand alone company to avail of that option, if itsactivities are such that it does not exceed the three specified thresholds as set out insection 32(3) (ii)-(iv). Those thresholds are turnover not to exceed €7.2million,balance sheet total not to exceed €3.6million, as well as number of employees not toexceed 50.

This means in effect, that notwithstanding the absence of a statutory definition of theterm, where a stand-alone company is not trading, does not employ staff and does nothold any significant assets, it will clearly be entitled to claim audit exemption.

However as currently constituted, this exemption is not available to dormantcompanies that are themselves part of a group of companies.

4.3.4 Arguments for and against the proposal

The Review Group considered the view that the necessity of providing individualaudit reports in respect of dormant companies which are part of a larger group, whenthey are in any event subject to a larger group audit, represents an additional burdenon business that is not justified. In practice, group audits are completed and signedoff, and it may be some considerable time afterwards that all of the necessary

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individual company audit reports are approved. The worth of this exercise isquestioned. The additional audit work required for even the most straightforwardaudit of a company with little or no activity is extensive, and the amount of work hasincreased substantially in recent years, notably due to the introduction of InternationalStandards in Auditing.

The Review Group notes that the extent of any cost saving has not been quantified. Inparticular, as such entities will be necessarily subject to audit work as part of thegroup audit, the amount saved may not be all that significant.

The Review Group noted that whilst it can be said that groups should have dormantcompanies struck-off or wound up, this will not be an option for many groups wherethe dormant subsidiaries are required to hold trademarks and other assets and the notinsignificant costs of a due diligence before taking the decision to dissolve a companyand the costs involved in voluntary-strike off and winding up.

The ODCE has also expressed wider concerns about the increase availability of auditexemption over the last ten years, without any study into the effects this has had onbusiness. The lack of any professional oversight of the activities of thousands of smallcompanies leaves them exposed to the potential for poor business practice, and evenillegal practice, perhaps unknowingly.

4.3.5 The UK position

Under UK law there is a specific exemption for all dormant companies, whether partof a group or not, and the term is defined as meaning a company that has “nosignificant accounting transactions” during the period. In considering whether acompany is dormant, the following transactions may be excluded:

payment for shares taken by subscribers to the memorandum of association; fees paid to the Registrar of Companies for a change of company name, the re-

registration of a company and filing annual returns; and payment made in respect of civil penalties imposed by the Registrar of

Companies for delivering accounts to the Registrar after the statutory timeallowed for filing.

4.3.6 Conclusions

On balance, the Review Group believes that there is merit in allowing certaincompanies that are dormant within a group to avail of audit exemption. However, inthe opinion of the Review Group the definition of dormant as contained in UKlegislation could be more narrowly defined. In particular it does not address the issuesof the assets and liabilities that may be carried on the balance sheet of a dormantcompany. There is a concern that certain assets or liabilities may be placeddeliberately in companies which would then be classified as dormant and not subjectto audit, which may lead to lesser oversight of such assets and liabilities withpotentially serious consequences for the group as a whole. Any such assets and

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liabilities would however be subject to audit at group level as they are consolidatedinto the group accounts.

In order to address this, it is proposed that the definition of dormant, in the context ofgroup companies, will require that such companies only have as assets or liabilitiesinter-company balances with other companies within the group.

4.3.7 Recommendation

The Review Group recommends that companies classified as dormant that aremembers of a group should be entitled to avail of the audit exemption and that theterm “dormant company” be defined as a company that had no significant accountingtransactions which were required to be entered in the company’s records during theperiod (as defined in UK legislation) and whose assets and liabilities consist solely ofinvestment in or amounts owed to and due from other companies within the group.

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Chapter 4 Modernisation Issues

4.4 Capital Maintenance: Member State Options under recent amendmentsto the Second Company Law Directive

4.4.1 BackgroundThe Second Directive on Capital Maintenance (2006/68/EC) contained mandatoryelements that were transposed by Statutory Instrument 89/2008. At the time, it wasdecided to leave the optional elements of the Directive to the upcoming CompaniesConsolidation and Reform Bill. While these optional elements are provided for in theGeneral Scheme, there was little substantive assessment of the merits or otherwise ofthese provisions done by the CLRG. Therefore, at the request of the Minister, theCLRG was asked to consider the optional elements in view of the implications for theBill.

4.4.2 Introduction

The Review Group reviewed the Member State options in Directive 2006/68/EC of 6September 2006 (the “2006 Directive”), which amended the Second Company LawDirective on company law (Council Directive 77/91/EEC of 13 December 1976 (the“Second Directive”), which concerned itself primarily the maintenance of capital).

The Second Directive was transposed in Ireland by the Companies (Amendment) Act1983. Whereas the scope of the Directive was expressed to be public limitedcompanies, as formed under the respective Member States’ laws, many provisions ofthe 1983 Act apply not only to non-public, private limited companies, but some alsoapply to unlimited companies.

Apart from accession treaties, the first amendment to the Second Directive wasDirective 92/101/EEC of 23 November 1992, which essentially provided that a PLC’ssubsidiary could not be used to circumvent the capital maintenance rules applicable toPLCs. This amending Directive was transposed by the European Communities(Public Limited Companies Subsidiaries) Regulations 1997 (SI 67 of 1997). TheCompanies Act 1990 Part XI transposed provisions of the Second Directive relevantto acquisition of own shares. Again the law was applied not only to PLCs but to alllimited companies, public or private.

Directive 2006/68/EC of 6 September 2006 amended the Second Directive in thefollowing areas:

- requiring amendments to:

(a) the procedure for reduction of capital of PLCs, by regulatinghow particular creditors may assert their rights; and

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(b) imposing new conditions on the redemption/purchase of sharesof PLCs,

which amendments, have, as stated above been made by the EuropeanCommunities (Public Limited Companies — Directive 2006/68/EC)Regulations 2008 (SI 89 of 2008).

- providing various options to Member States as to law that may be introduced(which in this Chapter are referred to as “Member State Options”); and

- specifying mandatory requirements where a Member State has a particular law(which are referred to in this Chapter as “Contingent MandatoryProvisions”).

More recently, on 16 September 2009, Directive 2009/109/EC was adopted, amendingthe Third, Sixth and Tenth Directives (on Mergers, Divisions and Cross-BorderMergers respectively) making incidental amendments to the Second Directive.

4.4.3 The Review Group and Maintenance of Capital

The Review Group has addressed issues concerning the maintenance of capital in anumber of its previous reports. Some of those recommendations have been adoptedby the Oireachtas and enacted into legislation, with other recommendations beingproposed to be enacted in the General Scheme of the Companies Bill:

- First Report (2002, for the programme period 2000-2001)

Chapter 5 Simplification: Creditor Protection reviewed the philosophy ofmaintenance of capital and put forward a number of recommendationsconcerning financial assistance by a company in connection with theacquisition of the company’s (or holding company’s) shares and the validationprocedure to approve such assistance. Many of these recommendations wereimplemented by the Investment Funds, Companies and MiscellaneousProvisions Act 2005, Part 6. The recommendation to repeal, for privatecompanies, the requirement for a “section 40 meeting” in the case of a loss ofnet assets as against share capital is included in the General Scheme.

Chapter 6 Simplification: Shareholder Protection included a recommendationregarding the procedures for acquisition of own shares, which is included inthe General Scheme.

- Second Report (2004, for the programme period 2002-2003)

Chapter 7 Share Capital reviewed in depth the issues concerning share capital,making several recommendations to simplify the law, as well as to allow, inprivate companies, the reduction of share capital and transactions akin to thereduction of capital by validation procedure.

- Fourth Report (2007, for the programme period 2006-2007)

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Chapter 7 Modernisation Issues again examined financial assistance by acompany in connection with the acquisition of the shares of a company or itsholding company. The Review Group made a number of recommendationsbut did not propose the repeal of the prohibition of financial assistance as hastaken place in the UK for private companies.

Chapter 7 also conducted a preliminary examination of a related issue, that ofdistributions to shareholders potentially arising from transfers within a groupat book value, whilst deferring coming to particular conclusions. That isfurther addressed in this Report in Section 4.1.

4.4.4 The Current Review

Whilst the Member State Options and Contingent Mandatory Provisions arising fromthe as-yet-not-transposed provisions of Directive 2006/68/EC and the more recentDirective and 2009/109/EC are not extensive, in order to make sense of them, it isrelevant to put them in the context of the overall Second Directive.

Set out in the Appendix to this Chapter is an unofficial consolidated text of theSecond Directive (based on a consolidated text published by the EuropeanCommission) identifying where applicable, the provenance of amending provisions,and the status of the Directive’s provisions in present Irish law and in the GeneralScheme. Member State Options and Contingent Mandatory Provisions are identifiedin the table.

The Review Group’s analysis of the Member State Options of the Second Directiveinserted by Directives 2006/68/EC and 2009/109/EC is set out below.

4.4.5 Valuation of non-cash assets contributed as consideration for allotment ofshares in a PLC

Section 30 of the Companies (Amendment) Act 1983, implementing Article 10 of theSecond Directive, requires, subject to exceptions, that non-cash considerationtendered as consideration for the allotment of shares in a PLC must be valued. Otherprovisions of the 1983 Act require that shares are not issued at a discount to thatvalue.

4.4.5.1 A new paragraph 5 in Article 10, inserted by Directive 2009/109/EC,provides that Member States have the option not to require a separateArticle 10 / section 30 valuation report on the formation of a new companyby way of merger or division where an independent expert's report on thedraft terms of the actual merger or division has been drawn up. WhereMember States allow this option, they may provide that the Article 10 /section 30 report and the independent expert's report on the draft terms ofmerger or division may be drawn up by the same expert or experts.

The Review Group agrees with the reasoning for this option as set out inRecital 9 of Directive 2009/109/EC which inserted it: “An independentexpert's report … is often not needed where an independent expert's report

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protecting the interests of shareholders or creditors also has to be drawn upin the context of the merger or the division. Member States shouldtherefore have the possibility in such cases of dispensing companies fromthe reporting requirement under Directive 77/91/EEC or of providing thatboth reports may be drawn up by the same expert.”

Recommendation:

The Review Group recommends that the Member State Option allowed byparagraph 5 be transposed into law.

4.4.5.2 The new Article 10a of the Second Directive provides that Member Statesmay waive the Article 10 / section 30 requirement for the valuation reporton non-cash consideration in one or more of three instances:

(i) traded securities;

(ii) assets other than securities by reference to a recent valuation, or

(iii) assets other than securities by reference to carrying value in themost recent annual accounts.

The philosophy of this provision is set out in Recital (4) of Directive2006/68/EC:

“Member States should be able to permit public limited liability companiesto allot shares for consideration other than in cash without requiring themto obtain a special expert valuation in cases in which there is a clear pointof reference for the valuation of such consideration. Nonetheless, the rightof minority shareholders to require such valuation should be guaranteed.”

4.4.5.3 Traded securities. Member States can provide that the valuation reportneed not be prepared where “transferable securities ... or money marketinstruments … are contributed as consideration … and those securities ormoney-market instruments are valued at the weighted average price atwhich they have been traded on one or more regulated market(s) … duringa sufficient period, to be determined by national law, preceding theeffective date of the contribution of the respective consideration other thanin cash.”

Recommendation

The Review Group is broadly satisfied that this is a logical and fairprovision, and recommends that it be transposed into law, subject to theperiod being no more than 5 dealing days immediately before the allotmentor unconditional agreement to allot.

4.4.5.4 Assets other than securities by reference to a recent valuation. MemberStates can provide that the valuation report need not be prepared where“assets, other than … transferable securities and money-market

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instruments … are contributed as consideration other than in cash whichhave already been subject to a fair value opinion by a recognisedindependent expert and where the following conditions are fulfilled:

(a) the fair value is determined for a date not more than six monthsbefore the effective date of the asset contribution;

(b) the valuation has been performed in accordance with generallyaccepted valuation standards and principles in the MemberState, which are applicable to the kind of assets to becontributed.”

A revaluation must be carried out by the directors “in the case of newqualifying circumstances that would significantly change the fair value ofthe asset at the effective date of its contribution”. Where such arevaluation does not take place one or more shareholders holding anaggregate percentage of at least 5% of the company's share capital candemand a valuation by an independent expert.

The Review Group observed that a 6 month period would allow thepotential for a significant movement in prices, not just in property but inother assets also. Accordingly it is appropriate for exceptional orqualifying circumstances to be contemplated.

Recommendation

The Review Group is, on balance, in favour of this provision, andrecommends that it be transposed into law, subject to:

- the period from sign-off of the valuation being not more than onemonth before the allotment or unconditional agreement to allot; or

- the directors, when resolving to allot the shares for the non-cashconsideration, being required to note and resolve that they aresatisfied that there are no new qualifying circumstances known tothem that appear to them to have significantly changed the fair valueof the assets being contributed at the date of the allotment orunconditional agreement to allot.

4.4.5.5 Assets other than securities by reference to carrying value in the mostrecent annual accounts. Member States can provide that the valuationreport need not be prepared where “assets, other than … transferablesecurities and money-market instruments … are contributed asconsideration other than in cash whose fair value is derived by individualasset from the statutory accounts of the previous financial year providedthat the statutory accounts have been subject to an audit …”. Theprovisions referred to at 4.2.5.4 as to intervening qualifying or exceptionalcircumstances and the right of the holders of 5% or more of shares torequire a valuation apply also.

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The Review Group is not in favour of this proposed exception: valuationscould be up to a year old, if, for example, a company with a31st December year end issues shares for non-cash consideration inDecember. The provision is not specific as to whether such assets are to bevalued at fair value in the balance sheet in the financial statements. Assetscan of course be valued at historic cost, amortised cost, the lower of costand net realisable value, and fair value in all its forms. Some of these canbear no relation to the actual market valuation of such an asset.

Recommendation:

The Review Group has concerns that, were this option to be implemented,shares might be issued in return for consideration that had a markedlydifferent value to that implied by such a valuation technique, therebydisadvantaging shareholders. Notwithstanding the protections allowingshareholders to call for a valuation, the Review Group believes that suchan option is has the potential for unfairness and recommends that it shouldnot be transposed into law.

4.4.6 The new Article 10b contains Contingent Mandatory Provisions, which mustbe transposed into a Member State’s law if any one or more of the MemberState Options in Article 10a are transposed into the Member State’s law.

4.4.6.1 Declaration by allotting company. Where consideration other than in cashas referred to in Article 10a occurs without an expert's report, within onemonth after the date of the asset contribution, a declaration containing thefollowing must be “published”:

“(a) a description of the consideration other than in cash at issue;

(b) its value, the source of this valuation and, where appropriate, themethod of valuation;

(c) a statement whether the value arrived at corresponds at least to thenumber, to the nominal value of, where there is no nominal value, theaccountable par and, where appropriate, to the premium on the sharesto be issued for such consideration;

(d) a statement that no new qualifying circumstances with regard to theoriginal valuation have occurred.”

Publication is be effected in the manner laid down by the laws of eachMember State in accordance with the First Company Law Directive68/151/EEC, which in Ireland has usually meant being delivered for filingto the registrar of companies.

Recommendation:

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The requirement to make and “publish” the declaration required by thisprovision should be stated to be the responsibility of the directors, withsection 383 of the Companies Act 1963 applying accordingly.

4.4.6.2 Enforcement. Each Member State is provide for adequate safeguardsensuring compliance with the procedure set out in Articles 10a and 10b.

Recommendation:

In view of the other provisions of the 1983 Act, which regulate what is tohappen where non-cash consideration is not valued correctly – theshareholder being obliged to pay the nominal value of and premiumpayable on the shares in question – the Review Group makes norecommendation for any further enforcement provisions.

4.4.7 Acquisition of own shares

Part XI of the Companies Act 1990 contains the law applicable to the acquisition by acompany limited by shares of its own shares, or shares in its holding company,reflecting the requirements of the Second Directive. Article 19 of the SecondDirective has been substituted by Directive 2006/68/EC. The original Article 19contained Contingent Mandatory Provisions to apply where a Member State’s lawspermitted a company to acquire its own shares.

4.4.7.1 The changes effected by Article 19 as substituted by Directive 2006/68/ECare these, some of which give rise to Member State Options:

(a) any acquisition must be subject to the principle of equaltreatment of all shareholders who are in the same position;

(b) any acquisition must be subject to compliance with the MarketAbuse Directive 2003/6/EC of 28 January 2006 (transposed inIreland by the Investment Funds, Companies andMiscellaneous Provisions Act 2005, Part 4 and SI No 342 of2005);

(c) the duration of a shareholders’ authority to the company’sboard to make acquisitions of shares can now extend up to 5years, rather than 18 months as at present.

(d) Member States may subject acquisitions of own shares to anyof the following conditions:

(i) that the nominal value or of the acquired shares,including shares previously acquired by the companyand held by it or its nominees (i.e. treasury shares)may not exceed a limit to be determined by MemberStates, but this limit cannot be lower than 10 % of thesubscribed capital. This contrasts with the previous

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Article 19 where the amount could not be greater than10%;

(ii) that the power of the company to acquire its ownshares, the maximum number of shares to be acquired,the duration of the period for which the power is givenand the maximum or minimum consideration are laiddown in the company’s statutes or in the instrument ofincorporation of the company;

(iii) that the company complies with appropriate reportingand notification requirements;

(iv) that particular companies, to be determined byMember States, may be required to cancel theacquired shares provided that an amount equal to thenominal value of the shares cancelled must beincluded in a reserve which cannot be distributed tothe shareholders, except in the event of a reduction incapital. This reserve may be used only for thepurposes of capitalisation issues;

(v) that the acquisition shall not prejudice the satisfactionof creditors' claims.

4.4.7.2 Extension of duration of share buy-back authority from 18 months to 5years. This aligns the period for such an authority with the 5 year periodfor allotment of shares under Article 25 (transposed in Ireland by section20 of the Companies (Amendment) Act 1983). Irish law at presentrequires an ordinary resolution for market purchases of own shares by aPLC and a special resolution with full disclosure of contract particulars inthe case of an off-market purchase of own shares. The Market AbuseRegulation 2273/2003 (included in Schedule 5 to SI 342 of 2003) ChapterII contains the procedures to be followed when a company, admitted totrading on a regulated market, repurchases its shares. Section 223 of theCompanies Act 1990 states requirements to be followed for such sharerepurchases by companies admitted to trading on the Irish Stock Exchange.

Recommendation:

Notwithstanding the legal protections in the Market Abuse Regulation andsection 223, misgivings were expressed by many members of the Group,and there was no great enthusiasm about the extension of duration of ashare repurchase authority. The Review Group also noted that generallyapproved corporate governance guidelines advocate an annualauthorisation to make market repurchases of shares.

Accordingly, the Review Group does not recommend making any changeto the existing law.

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4.4.7.3 Increase in the maximum amount of shares to be held in treasury from nomore than 10% to not less than 10%.

Recommendation:

The Review Group is of the view that there are no particular compellingreasons to increase the percentage limit on treasury shares from 10% andtherefore makes no recommendation on the subject.

4.4.7.4 Inclusion of maximum number of shares to be acquired, the duration ofauthority and the maximum or minimum consideration in company’sstatutes. Irish law at present requires an ordinary resolution for marketpurchases of own shares by a PLC and a special resolution with fulldisclosure of contract particulars in the case of an off-market purchase ofown shares. The requirement to include these particulars in the company’smemorandum and articles of association would require a specialresolution, and would preclude the current possibility of periodic ordinaryresolutions.

Recommendation:

The Review Group has not found any compelling reasons to vary thecurrent alternative requirements and therefore makes no recommendationon the subject.

4.4.7.5 Compliance with appropriate reporting and notification requirements.

Recommendation:

Although this is new text in the Article, the current law contains provisionsfor reporting to the registrar of companies and notification to shareholders,both by way of notice of meetings and resolutions and particulars in theannual audited accounts, and the Review Group makes norecommendation under this heading.

4.4.7.6 The acquisition should not prejudice the satisfaction of creditors' claims.

Recommendation:

Again, although this is new text in the Article, the general law addressesthis in many ways: requiring payment for acquired shares to come fromdistributable profits or a new issue, the matrix of law affecting companiesas they approach insolvency, and the liabilities of directors in that context.Accordingly the Review Group makes no recommendation under thisheading.

4.4.7.7 Acquisitions without shareholders’ approval to avoid serious andimminent harm. Article 19, as substituted repeats a Member State Optionwhich was in the original Article 19: this is to waive the requirement forshareholder’s approval (whether by ordinary or special resolution) where

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an acquisition “is necessary to prevent serious and imminent harm to thecompany”. In such a case, the “next general meeting” must be informed bythe directors of the reasons for and nature of the acquisitions effected, ofthe number and nominal value or, in the absence of a nominal value, theaccountable par, of the shares acquired, of the proportion of the subscribedcapital which they represent, and of the consideration for these shares.

This is not provided for in Irish law at present, save to the extent that anorder made under 1963 Act, s 205 to acquire the shares of a shareholdermay be considered to fall under this heading

Recommendation:

The Review Group has no enthusiasm for this option. The fact of its nothaving been transposed into law up until now is indicative of comparableviews of those who have examined the matter in the past.

4.4.7.8 Acquisitions without shareholders’ approval for employee share schemes.This option, also from the original Article 19, is consistent with thedisapplication (by statute sections 20(10) and 23(6) of the Companies(Amendment) Act requirement for a shareholder vote for employee sharescheme allotments.

Recommendation:

The Review Group recommends that this be transposed into law.

4.4.8 Financial assistance in connection with the acquisition of own shares

Section 60 of the Companies Act 1963, as amended, contains the Irish law regulatingthe giving by a company of financial assistance for the purpose of or in connectionwith the purchase of or subscription for shares in itself or in its holding company.The law in this section was the subject of the Review Group’s 2007 Report (in respectof the programme period 2006-2007). As the current review is concerned with thisissue too, it is worth stating the recommendations from that Report:

“a) Section 60(1) of the 1963 Act (which outlaws financial assistance forthe purpose of or in connection with purchases or subscriptions ofshares) be amended by the repeal of the words “or in connection with”.

(b) The law outlawing financial assistance in connection withsubscriptions for shares in public companies should be mitigated to thefullest extent. Some amendments should be made to the exceptions insection 60, in particular to provide expressly for brokerage andcommission in the terms of the recently repealed section 59 of the 1963Act.

(c) The prohibition on financial assistance in connection with the purchaseof shares will not prohibit a company from giving financial assistancefor the purchase of shares in itself or its holding company if—

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(i) the company’s principal purpose in giving the assistance isnot to give it for the purpose of any such acquisition, or

(ii) the giving of the assistance for that purpose is only anincidental part of some larger purpose of the company, and

(iii) the assistance is given in good faith in the interests of thecompany.”

4.4.9 Directive 2006/68/EC substituted Article 23 of the Second Directive, replacingthe general prohibition on PLCs giving financial assistance with ContingentMandatory Provisions to apply where a Member State’s laws permit the givingby a PLC of financial assistance. In summary they are these:

(a) the assistance cannot be gratuitous and must be at fair marketconditions, including with regard to interest and security; the creditstanding of each counterparty thereto must be investigated;

(b) the assistance requires prior notification to and prior shareholderapproval of the assistance;

(c) at the shareholders meeting, the shareholders must be presented awritten report indicating:

(i) the reasons for the transaction,

(ii) the interest of the company in entering into such a transaction;

(iii) the conditions on which the transaction is entered into;

(iv) the risks involved in the transaction for the liquidity andsolvency of the company; and

(v) the price at which the third party is to acquire the shares;

(d) the majority must be not less than 66⅔% or a bare majority where the attendance at the meeting represents at least 50% of the shares in issue;

(e) the aggregate financial assistance must not result in the reduction of thenet assets below share capital and undistributable reserves;

(f) where the assisted acquirer of shares is a director or connected person,then Member States must ensure that there are adequate safeguards forshareholders.

4.4.10 At present therefore, PLCs are forbidden to avail of the validation procedure insection 60 of the 1963 Act. The above-mentioned amendments to the SecondDirective provide the opportunity to Ireland to provide for a validation

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procedure for PLCs, but it will be one which has differences from that used byprivate companies.

4.4.10.1 When preparing the text for the General Scheme, the Review Groupnoted the then pending amendments to the Directive and envisaged thePLC validation procedure to be unremarkable, with the principalconcern being to blend what was proposed in the Directive with whatis required for a private company’s validation procedure. Recentcontroversy regarding reported financial assistance by public hasmeant that the Review Group has considered carefully whether suchfinancial assistance should be permitted. Whilst non-disclosure ratherthan the fact of financial assistance is of itself disturbing, real questionshave to be asked as to what benefit accrues to a company by providingfinancial assistance for the purpose of the acquisition of its shares.

4.4.10.2 A distinction can and should be made between the various types ofacquisitions of shares. For example, in the 2007 Report, the ReviewGroup’s recommendations were to liberalise financial assistance forthe purposes of a subscription for shares, as opposed to the purchase ofshares where the company is not a seller or purchaser.

4.4.10.3 The Review Group sees no virtue in any circumstances for a publiccompany to provide financial assistance for the purposes of a sale of itsshares among shareholders where the company is not a seller orpurchaser.

The Review Group considered whether the current prohibition onfinancial assistance of share subscriptions, where the company is a netbeneficiary of the subscription, should be repealed and the provisionsof Article 23 transposed into law, subject to e.g. a shareholder of 75%,requiring directors and connected persons that are financially assistednot to vote and otherwise aligning with the validation procedure forprivate companies. However, notwithstanding the distinction betweenpurchases and subscriptions, there was little enthusiasm in the ReviewGroup to transpose this Member State Option.

The Review Group noted also that the UK had not hastened totranspose this Member State Option, it is understood, not on account ofa policy objection, but, rather that its transposition was not considereda priority.

Recommendation

The Review Group recommends that this Member State Option shouldnot be transposed into Irish law.

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4.4.11 Other Member State Options

The review of Member State Options and related Contingent Mandatory Provisions inthis Chapter has been focussed on the optional amendments to the Second Directiveeffected by Directives 2006/68/EC and 2009/109/EC.

However, there is one other option which the Review Group has considered, theperiod for response to a company’s invitation to participate in a pre-emptive offer ofshares, such as a rights issue or open offer.

At present, section 23(8) of the Companies (Amendment) Act 1983 requires that acompany must give not less than 21 days’ notice to shareholders of a pre-emptiveoffer. In the UK, in a recent amendment to section 562(5) of their Companies Act2006 effected by Article 2 of the Companies (Share Capital and Acquisition byCompany of its Own Shares) Regulations 2009 (SI 2009/2022), that 21 day period hasbeen reduced to the Directive’s minimum of 14 days. This has been reflected also inamendments to the UK Listing Rules and Irish Listing Rules early in 2009 where therelevant rules as to duration of rights issue offer period has been reduced to a 10business-day period. Therefore, UK companies listed in Ireland making a pre-emptive offer in Ireland can at present have a 10-business-day offer period whereasIrish-incorporated companies are at present required to have a 21-day period.

It is arguable that current shareholders’ rights might be compromised by allowingonly 14 days to make a proper assessment of whether they wish to take up pre-emption rights, and also to ensure they can organise funding where relevant. Also, inthe context of some rights issues taking up to 80-90 days, there may be otheradministrative efficiencies in the process to be addressed.

As against that, the Review Group is, in this instance, in favour of aligning Irish lawwith that of the UK. In addition, in the case of funding requirements of companies,where there are competing interests between a company’s requirements for fundingand the individual interests of shareholders, it is arguable that the company’s interestshould prevail.

As stated in the UK’s analysis of the issue: “Increasing the efficiency of pre-emptiverights can benefit the market, companies and shareholders by helping to ensure thatthis model of capital raising retains its place in the UK market….. Rights issues are acommon capital raising technique for companies in the United Kingdom. Many of theproblems that emerged with the financial sector capital raisings were caused orexacerbated by the duration of the rights issues process. For example, potentiallyabusive trading strategies are aided by the longer period from announcement tocompletion; and significant market movements that erode discounts are more likelyover a longer time spell.”40

40 Explanatory Memorandum to the Companies (Share Capital and Acquisition by Company of its

Own Shares) Regulations 2009 No. 2022, p 7

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Recommendation:

The Review Group recommends that the period for response to a pre-emptive offer ofshares in section 23(8) of the 1983 Act be reduced from 21 days to 14 days.

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Chapter 5 - Items brought forward to the next Work Programme

Item 13 – Advise the Department of Enterprise, Trade and Employment on thevarious requirements on auditors to report under criminal justice legislation,under company law and, in particular, Recommendations arising out of theOECD Convention on Combating Bribery of Foreign Officials in InternationalBusiness Transactions.

The Convention on Combating Bribery of Foreign Public Officials in InternationalBusiness Transactions was drawn up under the auspices of the Organisation forEconomic Co-operation and Development and adopted in November 1997. ThisConvention was ratified on behalf of the Ireland in September 2003.

The Minister for Trade and Commerce asked the CLRG to consider therecommendations of the OECD report as part of its 2008/2009 Work Programme.The Review Group is still considering the recommendations of the Convention andhas asked the Minister to extend its consideration into its next Work Programme.

Item 14 - Consideration of the adoption, in Irish company law, of theUNCITRAL Model Law on Cross-Border Insolvency.

Adopted by United Nations Commission on International Trade Law (UNCITRAL) inMay 1997, the Model Law is designed to assist States to equip their insolvency lawswith a modern, harmonised and fair framework to address more effectively instancesof cross-border insolvency. Those instances include cases where the insolvent debtorhas assets in more than one State or where some of the creditors of the debtor are notfrom the State where the insolvency proceeding is taking place. The Model Lawrespects the differences among national procedural laws and does not attempt asubstantive unification of insolvency law.

The Minister for Trade and Commerce asked the CLRG to consider the merits ofincorporation of the Model Law into Irish law as part of its 2008/2009 WorkProgramme. The Review Group is still considering the issue and has asked theMinister to extend its consideration into its next Work Programme. Considerablework was done on this complex and potentially far-reaching proposal. The ReviewGroup has been engaged in a consultation process with interested parties on the issuesto which adoption of the Model Law would give rise, and this process had notconcluded at the end of the reporting period.

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Item 15 - To examine specific provisions under the Companies Acts and toreview if, in practice, their application is consistent with the underlying policyobjectives of the legislation, including improved compliance. Namely:

1. Abuse of Strike-off provisions;

The Review Group was asked by the Minister to consider this issue as part of its2008/2009 Work Programme. Part A12 of the General Scheme of the CompaniesConsolidation and Reform Bill brings together the many diverse provisions regardingthe Strike-off and Restoration of companies. At present it is possible for a companyto opt voluntarily to be struck off the companies register, under conditions laid downby the Registrar of Companies. The General Scheme provides that elements of theexisting voluntary strike-off process will be placed on a statutory footing. Inparticular, the company must pass a special resolution to seek the strike-off of thecompany. The Director of Corporate Enforcement is given power to require acompany to furnish a statement of affairs if it has been struck off involuntarily.

The Review Group has decided to keep the matter under review for the time being anddoes not propose any action in this area.

2. Late-filing penalties, and, in particular, the loss of exemption from the needto conduct a statutory audit;

The Review Group was asked by the Minister to consider this issue as part of its2008/2009 Work Programme. The Companies Registration Office put in place a latefiling system in 2001 to encourage companies to file their returns on time. Currently,companies that did not meet the deadline lose the exemption from the need to conducta statutory audit for two years. The Review Group is still considering the matter andhas asked the Minister to extend its consideration into its next Work Programme.

3. With reference to a small, select number of offences, consider whether thereis proportionality between the seriousness of the offence (and the likelihoodof malpractice) and its enforcement and whether offences under theCompanies Acts should be subject to civil or criminal action, or both.

The Review Group was asked by the Minister to consider this issue as part of its2008/2009 Work Programme. The Review Group is satisfied that the initiativeproposed in Head 57 of Part A13 of the General Scheme, which introduces thecategorisation of offences, deals in a satisfactory manner with the issue above. Thisinitiative proposes that the vast majority of offences under the Companies Acts shouldbe classified according to a four-fold scheme:

- Category 4 offences will be prosecutable only on a summary basis and onconviction, will give rise a fine of no more than €5,000.

- Category 3 offences will likewise be prosecutable only summarily but onconviction, may give rise to a prison sentence (of up to 12 months duration)and/or a fine of no more than €5,000.

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- Both Categories 2 and 1 offences will attract those same consequences (asCategory 3) when prosecuted summarily, but will also be capable of beingprosecuted on indictment where the judge will be able to penalise any personconvicted of a Category 2 offence by a fine of up to €50,000 and/orimprisonment for up to 5 years and in the case of a Category 1 offence, a fineof up to €500,000 and/or imprisonment for up to 10 years.

There are two exceptions in the case of the most serious offences, namely fraudulenttrading and market abuse. These offences are dealt with under the Investment Funds,Companies and Miscellaneous Provisions Act 2005.

Moreover, the duty of auditors to report their suspicion that an indictable offence hasbeen committed will be made easier to comply with, as the new provisions will meanonly Category 1 and 2 offences (as well as the other handful of offences) arereportable.

This four-fold system will allow for an appropriately graduated system of penalties asbetween different offence provisions. In preparing these Heads, the CLRG hasundertaken a comprehensive exercise, in conjunction with ODCE officials, ofclassifying the offences on what is thought to be the appropriate basis. In addition, itleads to the law being more easily understood because in each of the many provisionsthroughout the Bill creating offences, it is now possible to simply add a phrase alongthe lines of “which will be a Category 2 offence”.

A further innovative provision is introduced by Head 57(3) under which it is proposedthat following conviction for a Category 1, 2, 3 or 4 offence, the trial court may orderthat the convicted person should remedy any breach of the Companies Acts in respectof which they were convicted.

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of 13 December 1976 on coordination ofsafeguards which, for the protection of theinterests of members and others, arerequired by Member States of companieswithin the meaning of the second paragraphof Article 58 of the Treaty, in respect of theformation of public limited liabilitycompanies and the maintenance andalteration of their capital, with a view tomaking such safeguards equivalent

(77/91/EEC)

THE COUNCIL OF THE EUROPEANCOMMUNITIES,

Having regard to the Treaty establishing theEuropean Economic Community, and inparticular Article 54 (3) (g) thereof, Havingregard to the proposal from the Commission,

Having regard to the opinion of the EuropeanParliament41,

Having regard to the opinion of the Economicand Social Committee42,

Whereas the coordination provided for inArticle 54 (3) (g) and in the GeneralProgramme for the abolition of restrictions onfreedom of establishment, which was begun byDirective 68/151/EEC43, is especially importantin relation to public limited liability companies,because their activities predominate in theeconomy of the Member States and frequentlyextend beyond their national boundaries;

Whereas in order to ensure minimumequivalent protection for both shareholders andcreditors of public limited liability companies,the coordination of national provisions relatingto their formation and to the maintenance,increase or reduction of their capital isparticularly important;

41 OJ No C 114, 11. 11. 1971, p. 18.42 OJ No C 88, 6. 9. 1971, p. 143 OJ No L 65, 14. 3. 1968, p. 8.

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Whereas in the territory of the Community, thestatutes or instrument of incorporation of apublic limited liability company must make itpossible for any interested person to acquainthimself with the basic particulars of thecompany, including the exact composition ofits capital;

Whereas Community provisions should beadopted for maintaining the capital, whichconstitutes the creditors' security, in particularby prohibiting any reduction thereof bydistribution to shareholders where the latter arenot entitled to it and by imposing limits on thecompany's right to acquire its own shares;

Whereas it is necessary, having regard to theobjectives of Article 54 (3) (g), that theMember States' laws relating to the increase orreduction of capital ensure that the principles ofequal treatment of shareholders in the sameposition and of protection of creditors whoseclaims exist prior to the decision on reductionare observed and harmonized,

HAS ADOPTED THIS DIRECTIVE:

Article 1

1. The coordination measures prescribedby this Directive shall apply to the provisionslaid down by law, regulation or administrativeaction in Member States relating to thefollowing types of company: …….

— in Ireland:the public company limited by shares,the public company limited by guarantee andhaving a share capital;

The Companies(Amendment) Act1983 transposes theSecond Directiveand applies it to allcompanies, publicand private, limitedand unlimited.

Part A 3 appliesmany of theprovisions of theSecond Directive tocompaniesgenerally, with PartB2 covering PublicLimited Companiesand Part B3coveringDesignated ActivityCompanies

……

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The name for any company of the above typesshall comprise or be accompanied by adescription which is distinct from thedescription required of other types ofcompanies.

1983 Act s4Part B2, Head5/Part B3, Head 5

2. The Member States may decide not toapply this Directive to investment companieswith variable capital and to cooperativesincorporated as one of the types of companylisted in paragraph 1.

In so far as the laws of the Member Statesmake use of this option, they shall require suchcompanies to include the words ‘investmentcompany with variable capital’ or ‘cooperative’in all documents indicated in Article 4 ofDirective 68/151/EEC.

The expression ‘investment company withvariable capital’, within the meaning of thisDirective, means only those companies:

— the exclusive object of which is toinvest their funds in various stocks and shares,land or other assets with the sole aim ofspreading investment risks and giving theirshareholders the benefit of the results of themanagement of their assets,

— which offer their own shares forsubscription by the public, and

Member StateOption

Part B9, Head 2disapplies certainprovisions frominvestmentcompanies

— the statutes of which provide that,within the limits of a minimum and maximumcapital, they may at any time issue, redeem orresell their shares.

Member StateOption

Regulation 28 of theEuropeanCommunities(Undertakings forCollectiveInvestments inTransferableSecurities)Regulations 2003,SI 211 of 2003relieves UCITSfrom therequirement tocomply withprovisions of the1963, 1983, 1986and 1990 Acttransposing theDirective.

Section 260 of the1990 Act relievesPart XIIIinvestmentcompanies from therequirement tocomply withprovisions of the1963, 1983, 1986and 1990 Acttransposing theDirective.

Part B9, Head 2

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Article 2

The statutes or the instrument of incorporationof the company shall always give at least thefollowing information:

(a) the type and name of the company;

(b) the objects of the company;

(c) — when the company has noauthorized capital, the amount of the subscribedcapital,

— when the company has anauthorized capital, the amount thereof and alsothe amount of the capital subscribed at the timethe company is incorporated or is authorized tocommence business, and at the time of anychange in the authorized capital, withoutprejudice to Article 2 (1) (e) of Directive68/151/EEC;

(d) in so far as they are not legallydetermined, the rules governing the number ofand the procedure for appointing members ofthe bodies responsible for representing thecompany with regard to third parties,administration, management, supervision orcontrol of the company and the allocation ofpowers among those bodies;

1963 Act s 6Part B2, Head4/Part B3, Head 4

(e) the duration of the company, exceptwhere this is indefinite.

1963 Act s251(1)(a)

Part A11, Head20(2)(b)

Article 3

The following information at least must appearin either the statutes or the instrument ofincorporation or a separate document publishedin accordance with the procedure laid down inthe laws of each Member State in accordancewith Article 3 of Directive 68/151/EEC:

(a) the registered office; 1963 Act, s 113 Part A2, Head 33

(b) the nominal value of the sharessubscribed and, at least once a year, the numberthereof;

1963 Act, ss 6, 69,125

Part B2, Head4(2)(d)/Part B3,Head 4(2)(d); PartA3, Head 25; PartA6, Head 52

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(c) the number of shares subscribed withoutstating the nominal value, where such sharesmay be issued under national law;

Not applicable Not applicable

(d) the special conditions if any limiting thetransfer of shares;

1963 Act, s 11,1983 Act s 39

Part B2, Head4(3)/Part B3, Head4(3); Part A3, Head23

(e) where there are several classes ofshares, the information under (b), (c) and (d)for each class and the rights attaching to theshares of each class;

1963 Act, ss 6, 69,125

Part B2, Head4(2)(d)/Part B3,Head 4(2)(d); PartA3, Head 25; PartA6, Head 52

(f) whether the shares are registered orbearer, where national law provides for bothtypes, and any provisions relating to theconversion of such shares unless the procedureis laid down by law;

1963 Act ss 88, 6,11

Part A3, Head 29;Part B2, Head4/Part B3, Head 4

(g) the amount of the subscribed capitalpaid up at the time the company is incorporatedor is authorized to commence business;

1963 Act s 6Part B2, Head4(2)(d)/Part B3,Head 4(2)(d)

(h) the nominal value of the shares or,where there is not nominal value, the number ofshares issued for a consideration other than incash, together with the nature of theconsideration and the name of the personproviding this consideration;

1963 Act, s 58

Part A3, Head5(12); Part B2,Head 4(2)(d)/PartB3, Head 4(2)(d)

(i) the identity of the natural or legalpersons or companies or firms by whom or inwhose name the statutes or the instrument ofincorporation, or where the company was notformed at the same time, the drafts of thesedocuments, have been signed;

1963 Act, ss 5(1),6(4)

Part B2, Head3(1)/Part B3, Head3(1); Part B2, Head4(2)/Part B3, Head4(2)

(j) the total amount, or at least an estimate,of all the costs payable by the company orchargeable to it by reason of its formation and,where appropriate, before the company isauthorized to commence business;

1983 Act, s 6(3)(c)Part B2, Head7(3)(c)

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(k) any special advantage granted, at thetime the company is formed or up to the time itreceives authorization to commence business,to anyone who has taken part in the formationof the company or in transactions leading to thegrant of such authorization.

1983 Act, s 6(3)(d)Part B2, Head7(3)(d)

Article 4

1. Where the laws of a Member Stateprescribe that a company may not commencebusiness without authorization, they shall alsomake provision for responsibility for liabilitiesincurred by or on behalf of the company duringthe period before such authorization is grantedor refused.

2. Paragraph 1 shall not apply to liabilitiesunder contracts concluded by the companyconditionally upon its being grantedauthorization to commence business.

1983 Act s 6(8) Part B2, Head 7(8)

Article 5

1. Where the laws of a Member Staterequire a company to be formed by more thanone member, the fact that all the shares are heldby one person or that the number of membershas fallen below the legal minimum afterincorporation of the company shall not lead tothe automatic dissolution of the company.

1963 Act, s 36A PLC or DACmay be formed withone member

2. If in the cases referred to in paragraph1, the laws of a Member State permit thecompany to be wound up by order of the court,the judge having jurisdiction must be able togive the company sufficient time to regularizeits position.

1963 Act, ss 36,213(d)

A PLC or DACmay be formed withone member

3. Where such a winding up order is madethe company shall enter into liquidation.

1963 Act, s 220A PLC or DACmay be formed withone member

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Article 6

1. The laws of the Member States shallrequire that, in order that a company may beincorporated or obtain authorization tocommence business, a minimum capital shallbe subscribed the amount of which shall be notless than 25,000 [euros].

The ecus shall be that defined by CommissionDecision No 3289/75/ECSC44. The equivalentin national currency shall be calculated initiallyat the rate applicable on the date of adoption ofthis Directive.

1983 Act s 19(1)specifiesIR£30,000, now€38,092.41 as "theauthorisedminimum". Section19(2) enables agreater (but not alesser sum) to bespecified by ordermade by theMinister.

Part B2, Head 1

2. If the equivalent of the [euros] innational currency is altered so that the value ofthe minimum capital in national currencyremains less than 22,500 [euros] for a period ofone year, the Commission shall inform theMember State concerned that it must amend itslegislation to comply with paragraph 1 within12 months following the expiry of that period.However, the Member State may provide thatthe amended legislation shall not apply tocompanies already in existence until 18 monthsafter its entry into force.

No requirement totranspose.

No requirement totranspose.

3. Every five years the Council, acting ona proposal from the Commission, shall examineand, if need be, revise the amounts expressed inthis Article in [euros] in the light of economicand monetary trends in the Community and ofthe tendency towards allowing only large andmedium-sized undertakings to opt for the typesof company listed in Article 1 (1).

No requirement totranspose.

No requirement totranspose.

Article 7

The subscribed capital may be formed only ofassets capable of economic assessment.

1983 Act, s 26(1) Part A3, Head 6(1)

However, an undertaking to perform work orsupply services may not form part of theseassets.

1983 Act, s 26(2) Part B2, Head 17

44 OJ No L 327, 19. 12. 1975, p. 4.

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Article 8

1. Shares may not be issued at a pricelower than their nominal value, or, where thereis no nominal value, their accountable par.

1983 Act, s 27 Part A3, 6(2)

2. However, Member States may allowthose who undertake to place shares in theexercise of their profession to pay less than thetotal price of the shares for which theysubscribe in the course of this transaction.

Member StateOption

Not expressly takenup by Ireland. 1963Act, s 60(12)(m)exempts from theprohibition offinancial assistance:“in connection withan allotment ofshares by acompany or itsholding company,the payment by thecompany ofcommissions notexceeding 10 percent of the moneyreceived in respectof such allotment tointermediaries, andthe payment by thecompany ofprofessional fees”.

Member StateOption

Part A3, Head15(2)(m)

Article 9

1. Shares issued for a consideration mustbe paid up at the time the company isincorporated or is authorized to commencebusiness at not less than 25% of their nominalvalue or, in the absence of a nominal value,their accountable par.

1983 Act, s 28 Part B2, Head 19

2. However, where shares are issued for aconsideration other than in cash at the time thecompany is incorporated or is authorized tocommence business, the consideration must betransferred in full within five years of that time.

1983 Act, s 29 Part B2, Head 20

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Article 10

1. A report on any consideration other thanin cash shall be drawn up before the companyis incorporated or is authorized to commencebusiness, by one or more independent expertsappointed or approved by an administrative orjudicial authority. Such experts may be naturalpersons as well as legal persons and companiesor firms under the laws of each Member State.

2. The experts' report shall contain at leasta description of each of the assets comprisingthe consideration as well as of the methods ofvaluation used and shall state whether thevalues arrived at by the application of thesemethods correspond at least to the number andnominal value or, where there is no nominalvalue, to the accountable par and, whereappropriate, to the premium on the shares to beissued for them.

3. The expert's report shall be published inthe manner laid down by the laws of eachMember State, in accordance with Article 3 ofDirective 68/151/EEC.

1983 Act s 32 Part B2, Head 23

4. Member States may decide not to applythis Article where 90 % of the nominal value,or where there is no nominal value, of theaccountable par, of all the shares is issued toone or more companies for a considerationother than in cash, and where the followingrequirements are met:

(a) with regard to the company in receipt ofsuch consideration, the persons referred to inArticle 3 (i) have agreed to dispense with theexpert's report;

(b) such agreement has been published asprovided for in paragraph 3;

Member StateOption

Taken by Ireland.1983 Act, s 32(1),(3)

Member StateOption

Part B2, Head23(1), (3)

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(c) the companies furnishing suchconsideration have reserves which may not bedistributed under the law or the statutes andwhich are at least equal to the nominal value or,where there is no nominal value, theaccountable par of the shares issued forconsideration other than in cash;

(d) the companies furnishing suchconsideration guarantee, up to an amount equalto that indicated in paragraph (c), the debts ofthe recipient company arising between the timethe shares are issued for a consideration otherthan in cash and one year after the publicationof that company's annual accounts for thefinancial year during which such considerationwas furnished.

Any transfer of these shares is prohibitedwithin this period;

(e) the guarantee referred to in (d) has beenpublished as provided for in paragraph 3;

(f) the companies furnishing suchconsideration shall place a sum equal to thatindicated in (c) into a reserve which may not bedistributed until three years after publication ofthe annual accounts of the recipient companyfor the financial year during which suchconsideration was furnished or, if necessary,until such later date as all claims relating to theguarantee referred to in (d) which are submittedduring this period have been settled.

545.[ Member States may decide not to applythis Article to the formation of a new companyby way of merger or division where anindependent expert's report on the draft termsof merger or division is drawn up.

Member StateOption

Not yet transposed

Member StateOption

Not yet transposed

45 Paragraph 5 inserted by Directive 2009/109/EC, Article 1.2.

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Where Member States decide to apply thisArticle in the cases referred to in the firstsubparagraph, they may provide that the reportunder this Article and the independent expert'sreport on the draft terms of merger or divisionmay be drawn up by the same expert orexperts.]

Seerecommendation7.2

[Article 10a46

1. Member States may decide not to applyArticle 10(1), (2) and (3) where, upon adecision of the administrative or managementbody, transferable securities as defined in point18 of Article 4(1) of Directive 2004/39/EC ofthe European Parliament and of the Council of21 April 2004 on markets in financialinstruments (1) 47or money market instrumentsas defined in point 19 of Article 4(1) of thatDirective are contributed as consideration otherthan in cash, and those securities or money-market instruments are valued at the weightedaverage price at which they have been tradedon one or more regulated market(s) as definedin point 14 of Article 4(1) of that Directiveduring a sufficient period, to be determined bynational law, preceding the effective date of thecontribution of the respective considerationother than in cash.

Member StateOption

See paragraph 7 ofthis [Chapter]

Member StateOption

Part B2, Head29(1)(a)

46 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

47 OJ L 145, 30.4.2004, p. 1. Directive as last amended by Directive 2006/31/EC (OJ L 114,27.4.2006, p. 60).

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However, where that price has been affected byexceptional circumstances that wouldsignificantly change the value of the asset at theeffective date of its contribution, includingsituations where the market for suchtransferable securities or money-marketinstruments has become illiquid, a revaluationshall be carried out on the initiative and underthe responsibility of the administrative ormanagement body. For the purposes of theaforementioned revaluation, Article 10(1), (2)and (3) shall apply.

2. Member States may decide not to applyArticle 10(1), (2) and (3) where, upon adecision of the administrative or managementbody, assets, other than the transferablesecurities and money-market instrumentsreferred to in paragraph 1, are contributed asconsideration other than in cash which havealready been subject to a fair value opinion by arecognised independent expert and where thefollowing conditions are fulfilled:(a) the fair value is determined for a datenot more than six months before the effectivedate of the asset contribution;(b) the valuation has been performed inaccordance with generally accepted valuationstandards and principles in the Member State,which are applicable to the kind of assets to becontributed.

Member StateOption

Part B2, Head29(1)(b)

In the case of new qualifying circumstancesthat would significantly change the fair value ofthe asset at the effective date of its contribution,a revaluation shall be carried out on theinitiative and under the responsibility of theadministrative or management body. For thepurposes of the aforementioned revaluation,Article 10(1), (2) and (3) shall apply.

Member StateOption

See paragraph 7 ofthis [Chapter]

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In the absence of such a revaluation, one ormore shareholders holding an aggregatepercentage of at least 5% of the company'ssubscribed capital on the day the decision onthe increase in the capital is taken may demanda valuation by an independent expert, in whichcase Article 10(1), (2) and (3) shall apply.Such shareholder(s) may submit a demand upuntil the effective date of the asset contribution,provided that, at the date of the demand, theshareholder(s) in question still hold(s) anaggregate percentage of at least 5% of thecompany's subscribed capital, as it was on theday the decision on the increase in the capitalwas taken.

Part B2, Head 29(2)

3. Member States may decide not to applyArticle 10(1), (2) and (3) where, upon adecision of the administrative or managementbody, assets, other than the transferablesecurities and money-market instrumentsreferred to in paragraph 1, are contributed asconsideration other than in cash whose fairvalue is derived by individual asset from thestatutory accounts of the previous financial yearprovided that the statutory accounts have beensubject to an audit in accordance with Directive2006/43/EC of the European Parliament and ofthe Council of 17 May 2006 on statutory auditsof annual accounts and consolidated accounts(1).

The second and third subparagraphs ofparagraph 2 shall apply mutatis mutandis.

Member StateOption

See paragraph 7 ofthis [Chapter]

Member StateOption

Part B2, Head29(1)(b)

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Article 10b48

1. Where consideration other than in cashas referred to in Article 10a occurs without anexpert's report as referred to in Article 10(1),(2) and (3), in addition to the requirements setout in point (h) of Article 3 and within onemonth after the effective date of the assetcontribution, a declaration containing thefollowing shall be published:(a) a description of the consideration otherthan in cash at issue;(b) its value, the source of this valuationand, where appropriate, the method ofvaluation;(c) a statement whether the value arrived atcorresponds at least to the number, to thenominal value or, where there is no nominalvalue, the accountable par and, whereappropriate, to the premium on the shares to beissued for such consideration;(d) a statement that no new qualifyingcircumstances with regard to the originalvaluation have occurred.That publication shall be effected in the mannerlaid down by the laws of each Member State inaccordance with Article 3 of Directive68/151/EEC.

ContingentMandatoryProvision

ContingentMandatoryProvision

Part B2, Head 29(3)

48 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

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2. Where consideration other than in cashis proposed to be made without an expert'sreport as referred to in Article 10(1), (2) and (3)in relation to an increase in the capital proposedto be made under Article 25(2), anannouncement containing the date when thedecision on the increase was taken and theinformation listed in paragraph 1 shall bepublished, in the manner laid down by the lawsof each Member State in accordance withArticle 3 of Directive 68/151/EEC, before thecontribution of the asset as consideration otherthan in cash is to become effective. In thatevent, the declaration pursuant to paragraph 1shall be limited to the statement that no newqualifying circumstances have occurred sincethe aforementioned announcement waspublished.

ContingentMandatoryProvision

ContingentMandatoryProvision

Part B2, Head 29(3)

3. Each Member State shall provide foradequate safeguards ensuring compliance withthe procedure set out in Article 10a and in thisArticle where a contribution for a considerationother than in cash is made without an expert'sreport as referred to in Article 10(1), (2) and(3).]

ContingentMandatoryProvision

Under the 1983 Act,where non-cashconsideration is notvalued correctly, theshareholder mustpay the nominalvalue of andpremium payableon the shares inquestion. 1983 Act,s 30(10)

ContingentMandatoryProvision

Part B2, Head21(10)

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Article 11

1. If, before the expiry of a time limit laiddown by national law of at least two years fromthe time the company is incorporated or isauthorized to commence business, the companyacquires any asset belonging to a person orcompany or firm referred to in Article 3 (i) fora consideration of not less than one-tenth of thesubscribed capital, the acquisition shall beexamined and details of it published in themanner provided for in [Article 10(1), (2) and(3)] 49 and it shall be submitted for the approvalof the general meeting. [Articles 10a and 10bshall apply mutatis mutandis.] 50

1983 Act, s 32 Part B2, Head 23

Member States may also require theseprovisions to be applied when the assets belongto a shareholder or to any other person.

Member StateOption

Taken up in part:extended toshareholders by1983 Act s 32(2)(b)

Member StateOption

Part B2, Head23(2)(b)

2. Paragraph 1 shall not apply toacquisitions effected in the normal course ofthe company's business, to acquisitions effectedat the instance or under the supervision of anadministrative or judicial authority, or to stockexchange acquisitions.

1983 Act s 32(4) Part B2, Head 23(4)

Article 12

Subject to the provisions relating to thereduction of subscribed capital, theshareholders may not be released from theobligation to pay up their contributions.

1963 Act, s 72 Part A3, Head 17

49 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

50 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

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Article 13

Pending coordination of national laws at asubsequent date, Member States shall adopt themeasures necessary to require provision of atleast the same safeguards as are laid down inArticles 2 to 12 in the event of the conversionof another type of company into a publiclimited liability company.

1983 Act, s 37 Part B6, Head 9

Article 14

Articles 2 to 13 shall not prejudice theprovisions of Member States on competenceand procedure relating to the modification ofthe statutes or of the instrument ofincorporation.

1963 Act ss 9(restriction onalteration ofmemorandum), 10(change of objects),15 (change ofarticles), 23 (changeof name), 68(change ofauthorised capital)all unaffected bytransposition ofDirective77/91/EEC

Part A2, Head 4;Part B2, Head11/Part B3, Head 8;Part B2, Head12/Part A2, Head15; Part A2, Head13; Part A3, Head16

Article 15

1. (a) Except for cases of reductions ofsubscribed capital, no distribution toshareholders may be made when on the closingdate of the last financial year the net assets asset out in the company's annual accounts are, orfollowing such a distribution would become,lower than the amount of the subscribed capitalplus those reserves which may not bedistributed under the law or the statutes.

1983 Act, s 46 Part B2, Head 57

(b) Where the uncalled part of thesubscribed capital is not included in the assetsshown in the balance sheet, this amount shallbe deducted from the amount of subscribedcapital referred to in paragraph (a).

1983 Act, s 46(4) Part B2, Head 57(4)

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(c) The amount of a distribution toshareholders may not exceed the amount of theprofits at the end of the last financial year plusany profits brought forward and sums drawnfrom reserves available for this purpose, lessany losses brought forward and sums placed toreserve in accordance with the law or thestatutes.

1983 Act, s 45 Part A3, Head 49

(d) The expression ‘distribution’ used insubparagraphs (a) and (c) includes in particularthe payment of dividends and of interestrelating to shares.

1983 Act, s 51 Part A3, Head 53

2. When the laws of a Member State allowthe payment of interim dividends, the followingconditions at least shall apply:

(a) interim accounts shall be drawn upshowing that the funds available for distributionare sufficient,

(b) the amount to be distributed may notexceed the total profits made since the end ofthe last financial year for which the annualaccounts have been drawn up, plus any profitsbrought forward and sums drawn from reservesavailable for this purpose, less losses broughtforward and sums to be placed to reservepursuant to the requirements of the law or thestatutes.

1983 Act, s 49(5) Part B2, Head 58(5)

3. Paragraphs 1 and 2 shall not affect theprovisions of the Member States as regardsincreases in subscribed capital by capitalizationof reserves.

Regulations 130,130A and 131 ofTable A areunaffected by PartIV of the 1983 Act.

Part A3, Head 55

4. The laws of a Member State mayprovide for derogations from paragraph 1 (a) inthe case of investment companies with fixedcapital.

The expression ‘investment company withfixed capital’, within the meaning of thisparagraph means only those companies:

Member StateOption1983 Act, s 47

Member StateOptionPart B9, Head 1251

51Since this is not an investment company to which Part XIII of the 1990 Act applies and it appears that

none have in fact been registered, consideration might be given to discontinue this derogation.

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— the exclusive object of which is toinvest their funds in various stocks and shares,land or other assets with the sole aim ofspreading investment risks and giving theirshareholders the benefit of the results of themanagement of their assets, and

— which offer their own shares forsubscription by the public.

In so far as the laws of Member States makeuse of this option they shall:

(a) require such companies to include theexpression ‘investment company’ in alldocuments indicated in Article 4 of Directive68/151/EEC;

(b) not permit any such company whose netassets fall below the amount specified inparagraph 1 (a) to make a distribution toshareholders when on the closing date of thelast financial year the company's total assets asset out in the annual accounts are, or followingsuch distribution would become, less than one-and-a half times the amount of the company'stotal liabilities to creditors as set out in theannual accounts;

(c) require any such company which makesa distribution when its net assets fall below theamount specified in paragraph 1 (a) to includein its annual accounts a note to that effect.

Article 16

Any distribution made contrary to Article 15must be returned by shareholders who havereceived it if the company proves that theseshareholders knew of the irregularity of thedistributions made to them, or could not inview of the circumstances have been unawareof it.

1983 Act, s 50 Part A3, Head 52

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Article 17

1. In the case of a serious loss of thesubscribed capital, a general meeting ofshareholders must be called within the periodlaid down by the laws of the Member States, toconsider whether the company should bewound up or any other measures taken.

1983 Act, s 40 Part B2, Head 67

2. The amount of a loss deemed to beserious within the meaning of paragraph 1 maynot be set by the laws of Member States at afigure higher than half the subscribed capital.

1983 Act, s 40(1) Part B2, Head 67(1)

Article 18

1. The shares of a company may not besubscribed for by the company itself.

1983 Act, s 41 Part A3, Head 36

2. If the shares of a company have beensubscribed for by a person acting in his ownname, but on behalf of the company, thesubscriber shall be deemed to have subscribedfor them for his own account.

1983 Act, s 42 Part A3, Head 37

3. The persons or companies or firmsreferred to in Article 3 (i) or, in cases of anincrease in subscribed capital, the members ofthe administrative or management body shall beliable to pay for shares subscribed incontravention of this Article.

1983 Act, s 42(2)(b)

Part A3, Head37(2)(b)

However, the laws of a Member State mayprovide that any such person may be releasedfrom his obligation if he proves that no fault isattributable to him personally.

Member StateOptionNot expressly taken,but under 1983 Act,s42(4), Court mayrelieve director ofliability.

Member StateOptionPart A3, Head37(4)

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Article 1952 [1. Without prejudice to the principle ofequal treatment of all shareholders who are inthe same position, and to Directive 2003/6/ECof the European Parliament and of the Councilof 28 January 2003 on insider dealing andmarket manipulation (market abuse)53, MemberStates may permit a company to acquire its ownshares, either itself or through a person actingin his own name but on the company's behalf.

Member StateOptionTransposed by 1990Act, Part XI

Member StateOptionPart A3, Chapter 6;Part B2, Heads 52to 56

To the extent that the acquisitions arepermitted, Member States shall make suchacquisitions subject to the following conditions:

(a) authorisation shall be given by thegeneral meeting, which shall determine theterms and conditions of such acquisitions, and,in particular, the maximum number of shares tobe acquired, the duration of the period forwhich the authorisation is given, the maximumlength of which shall be determined by nationallaw without, however, exceeding five years,and, in the case of acquisition for value, themaximum and minimum consideration.

Members of the administrative or managementbody shall satisfy themselves that, at the timewhen each authorised acquisition is effected,the conditions referred to in points (b) and (c)are respected;

1990 Act, ss 212 –216Member StateOptionAt presentmaximum durationof the authority toacquire own shareson the market is 18months – 1990 Act,s 216(1).Time can beextended from 18months to 5 years

Part A3, Head 38;Part B2, Head 52Member StateOptionTransposed withmaximum durationof authorityof 5years – Part B2,Head 52(3) to bereduced to 18months inaccordance withCLRGRecommendation9.2

52 Article 19 substituted by Directive 2006/68/EC of the European Parliament and of the Council of6 September 2006 L 264 32 25.9.2006.

53 OJ L 96, 12.4.2003, p. 16.

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(b) the acquisitions, including sharespreviously acquired by the company and heldby it, and shares acquired by a person acting inhis own name but on the company's behalf,may not have the effect of reducing the netassets below the amount mentioned in points(a) and (b) of Article 15(1);

Transposed bycombination of1983 Act, s 46 (asamended by SI 89of 2008) (limitationon PLC payingdividends) and 1990Act, s 208,requiring thatredemptions orpurchases of sharescan only be fundedout of profitsavailable fordistribution or theproceeds of a newissue.

Part B2, Head 57;Part A3, Head38(9)-(11)

(c) only fully paid-up shares may beincluded in the transaction.

Transposed by 1990Act, s 207(2)(b).

Omitted in GeneralScheme

Furthermore, Member States may subjectacquisitions within the meaning of the firstsubparagraph to any of the followingconditions:

(i) that the nominal value or, in the absencethereof, the accountable par of the acquiredshares, including shares previously acquired bythe company and held by it, and sharesacquired by a person acting in his own namebut on the company's behalf, may not exceed alimit to be determined by Member States.

Transposed by 1990Act s 209(2)(a),

Part A3, Head41(1)(a)

This limit may not be lower than 10 % of thesubscribed capital;

Member StateOptionPart A3, Head41(1)(a)The limit is set at10%, originally themaximum, now theminimum.

Member StateOptionPart A3, Head41(1)(a)The limit is set at10%, originally themaximum, now theminimum

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(ii) that the power of the company toacquire its own shares within the meaning ofthe first subparagraph, the maximum number ofshares to be acquired, the duration of the periodfor which the power is given and the maximumor minimum consideration are laid down in thestatutes or in the instrument of incorporation ofthe company;

Transposed by (i)1990 Act s 207,requiring thepower to redeem (orpurchase) sharesmust be in thecompany’s articles;(ii) the extent andduration of theauthority must be inan ordinary orspecial resolutionpassed by themembers in generalmeeting.

Part A3, Head 38[Note: The powerto redeem (orpurchase) is notspecificed ashaving to beincluded in thecompany’s articles– see Head 38(3)]

(iii) that the company complies withappropriate reporting and notificationrequirements;

If a purchase isapproved by specialresolution (for offmarket purchases) itmust be deliveredfor registration tothe CRO under1963 Act, s143(4)(a). Ifapproved byordinary resolutionit must be filed byvirtue of 1990 Act,s 215(2) and1963 Act, s 143.

Part A4, Head68(4); Part B2,Head 52(2)

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(iv) that certain companies, as determinedby Member States, may be required to cancelthe acquired shares provided that an amountequal to the nominal value of the sharescancelled must be included in a reserve whichcannot be distributed to the shareholders,except in the event of a reduction in thesubscribed capital. This reserve may be usedonly for the purposes of increasing thesubscribed capital by the capitalisation ofreserves;

Member StateOptionTransposed in part.1990 Act Part XIdoes not stipulatethat certaincompanies mustcancel their shares.Howeverrequirement totransfer nominalvalue to capitalredemption reservefund is provided forat 1990 Act, s208(b).

Member StateOptionPart A3, Head38(10) –“undenominatedcapital”

(v) that the acquisition shall not prejudicethe satisfaction of creditors' claims.

General companylaw principles

Part A3, Head18(3); Part A4,Head 71(4)(b), (9)

2. The laws of a Member State mayprovide for derogations from the first sentenceof paragraph 1 (a) where the acquisition of acompany's own shares is necessary to preventserious and imminent harm to the company. Insuch a case, the next general meeting must beinformed by the administrative or managementbody of the reasons for and nature of theacquisitions effected, of the number andnominal value or, in the absence of a nominalvalue, the accountable par, of the sharesacquired, of the proportion of the subscribedcapital which they represent, and of theconsideration for these shares.

Member StateOption

Not transposed

Member StateOption

Not transposedSeeRecommendation9.7

3. Member States may decide not to applythe first sentence of paragraph 1 (a) to sharesacquired by either the company itself or by aperson acting in his own name but on thecompany's behalf, for distribution to thatcompany's employees or to the employees of anassociate company. Such shares must bedistributed within 12 months of theiracquisition.

Member StateOption

Not transposed

Member StateOption

SeeRecommendation9.8

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Article 20

1. Member States may decide not to applyArticle 19 to:

Member StateOptions

(a) shares acquired in carrying out adecision to reduce capital, or in thecircumstances referred to in Article 39;

(a) Transposed by1963 Act, s 72

Part A3, Head 17

(b) shares acquired as a result of a universaltransfer of assets;

(b) Refers to thecontribution ofassets of anindependent branchor activity back tothe company itself,a concept undercivillaw.

Not transposed

(c) fully paid-up shares acquired free ofcharge or by banks and other financialinstitutions as purchasing commission;

(c) 1983 Act, s41(2) - acquisitionof shares other thanfor valuableconsideration.Shares ascommission are notexpressly providedfor. 1963 Act, s60(12)(m) exemptsfrom the prohibitionof financialassistance: “inconnection with anallotment of sharesby a company or itsholding company,the payment by thecompany ofcommissions notexceeding 10 percent of the moneyreceived in respectof such allotment tointermediaries, andthe payment by thecompany ofprofessional fees”.

Part A3, Head36(1)(a); Part A3,Head 15(2)(m)

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(d) shares acquired by virtue of a legalobligation or resulting from a court ruling forthe protection of minority shareholders in theevent, particularly, of a merger, a change in thecompany's object or form, transfer abroad ofthe registered office, or the introduction ofrestrictions on the transfer of shares;

(d) 1983 Act, s41(4)(c)

Part A3, Head36(1)(d)

(e) shares acquired from a shareholder inthe event of failure to pay them up;

(e) 1983 Act, s41(4)(d)

Part A3, Head36(1)(b)

(f) shares acquired in order to indemnifyminority shareholders in associated companies;

(f) This is notexpressly providedfor.

n/a

(g) fully paid-up shares acquired under asale enforced by a court order for the paymentof a debt owed to the company by the owner ofthe shares;

(g) This is akin toforfeiture, asprovided byparagraph (e).

n/a

(h) fully paid-up shares issued by aninvestment company with fixed capital, asdefined in the second subparagraph of Article15 (4), and acquired at the investor's request bythat company or by an associate company.Article 15 (4) (a) shall apply. Theseacquisitions may not have the effect ofreducing the net assets below the amount of thesubscribed capital plus any reserves thedistribution of which is forbidden by law.

(h) Regulation 28 ofthe EuropeanCommunities(Undertakings forCollectiveInvestments inTransferableSecurities)Regulations 2003,SI211 of 2003 relievesUCITS from therequirement tocomply with (interalia) 1983 Act s 41,which transposesthe relevant part ofthe Directive.Section 260 of the1990 Act similarlyrelieves Part XIIIinvestmentcompanies from therequirements.

Part B9, Head 2

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2. Shares acquired in the cases listed inparagraph 1 (b) to (g) above must, however, bedisposed of within not more than three years oftheir acquisition unless the nominal value or, inthe absence of a nominal value, the accountablepar of the shares acquired, including shareswhich the company may have acquired througha person acting in his own name but on thecompany's behalf, does not exceed 10 % of thesubscribed capital.

1983 Act, s 43Part B2, Head 41(3)and (14)

3. If the shares are not disposed of withinthe period laid down in paragraph 2, they mustbe cancelled. The laws of a Member State maymake this cancellation subject to acorresponding reduction in the subscribedcapital. Such a reduction must be prescribedwhere the acquisition of shares to be cancelledresults in the net assets having fallen below theamount specified in [ points (a) and (b) ofArticle 15(1).] 54

1983 Act, s 43Part B2, Head 41(3)and (14)

Article 21

Shares acquired in contravention of Articles 19and 20 shall be disposed of within one year oftheir acquisition. Should they not be disposedof within that period, Article 20 (3) shall apply.

1983 Act, s 43Part B2, Head 41(3)and (14)

Article 22

1. Where the laws of a Member Statepermit a company to acquire its own shares,either itself or through a person acting in hisown name but on the company's behalf, theyshall make the holding of these shares at alltimes subject to at least the followingconditions:

Part A3, Head41(2); Part A3,Head 46(2)(b)/PartB3, Head 16(2)(b)

(a) among the rights attaching to the shares,the right to vote attaching to the company's ownshares shall in any event be suspended;

(b) if the shares are included among theassets shown in the balance sheet, a reserve ofthe same amount, unavailable for distribution,shall be included among the liabilities.

1990 Act ss 209(3),224(2)(b)

54 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

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2. Where the laws of a Member Statepermit a company to acquire its own shares,either itself or through a person acting in hisown name but on the company's behalf, theyshall require the annual report to state at least:

(a) the reasons for acquisitions made duringthe financial year;

(b) the number and nominal value or, in theabsence of a nominal value, the accountable parof the shares acquired and disposed of duringthe financial year and the proportion of thesubscribed capital which they represent;

(c) in the case of acquisition or disposal fora value, the consideration for the shares;

(d) the number and nominal value or, in theabsence of a nominal value, the accountable parof all the shares acquired and held by thecompany and the proportion of the subscribedcapital which they represent.

1986 Act, s 14 Part A6, Head 40

Article 2355 [1. Where Member States permit acompany to, either directly or indirectly,advance funds or make loans or providesecurity, with a view to the acquisition of itsshares by a third party, they shall make suchtransactions subject to the conditions set out inthe second, third, fourth and fifthsubparagraphs.

ContingentMandatoryProvision

Not transposed

ContingentMandatoryProvisionTransposedPart A3, Head 15;Part B2, Head 33

[Second] The transactions shall take placeunder the responsibility of the administrative ormanagement body at fair market conditions,especially with regard to interest received bythe company and with regard to securityprovided to the company for the loans andadvances referred to in the first subparagraph.The credit standing of the third party or, in thecase of multiparty transactions, of eachcounterparty thereto shall have been dulyinvestigated.

ContingentMandatoryProvision

Not transposed

ContingentMandatoryProvisionTransposedPart B2, Head 33(a)

55 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

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[Third] The transactions shall be submitted bythe administrative or management body to thegeneral meeting for prior approval, whereby thegeneral meeting shall act in accordance withthe rules for a quorum and a majority laid downin Article 40. The administrative ormanagement body shall present a written reportto the general meeting, indicating the reasonsfor the transaction, the interest of the companyin entering into such a transaction, theconditions on which the transaction is enteredinto, the risks involved in the transaction for theliquidity and solvency of the company and theprice at which the third party is to acquire theshares. This report shall be submitted to theregister for publication in accordance withArticle 3 of Directive 68/151/EEC.

ContingentMandatoryProvision

Not transposed

ContingentMandatoryProvisionTransposedPart B2, Head 33(b)

[Fourth] The aggregate financial assistancegranted to third parties shall at no time result inthe reduction of the net assets below theamount specified in points (a) and (b) of Article15(1), taking into account also any reduction ofthe net assets that may have occurred throughthe acquisition, by the company or on behalf ofthe company, of its own shares in accordancewith Article 19(1). The company shall include,among the liabilities in the balance sheet, areserve, unavailable for distribution, of theamount of the aggregate financial assistance.

ContingentMandatoryProvision

Not transposed

ContingentMandatoryProvisionTransposedPart B2, Head33(c)-(d)

[Fifth] Where a third party by means offinancial assistance from a company acquiresthat company's own shares within the meaningof Article 19(1) or subscribes for shares issuedin the course of an increase in the subscribedcapital, such acquisition or subscription shall bemade at a fair price.]

ContingentMandatoryProvision

Not transposed

ContingentMandatoryProvisionTransposedPart B2, Head 33(e)

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2. Paragraph 1 shall not apply totransactions concluded by banks and otherfinancial institutions in the normal course ofbusiness, nor to transactions effected with aview to the acquisition of shares by or for thecompany's employees or the employees of anassociate company. However, thesetransactions may not have the effect ofreducing the net assets below the amountspecified in Article 15 (1) (a).

1963 Act, s60(12)(d)(e)(f), (13)

Part A3, Head15(2)(d)(e)(f)

3. Paragraph 1 shall not apply totransactions effected with a view to acquisitionof shares as described in Article 20 (1) (h).

EuropeanCommunities(Undertakings forCollectiveInvestments inTransferableSecurities)Regulations 2003,SI 211 of 2003, reg28;1990 Act, s 260

Part B9, Head 2

[Article 23a56

In cases where individual members of theadministrative or management body of thecompany being party to a transaction referredto in Article 23(1), or of the administrative ormanagement body of a parent undertakingwithin the meaning of Article 1 of CouncilDirective 83/349/EEC of 13 June 1983 onconsolidated accounts 57or such parentundertaking itself, or individuals acting in theirown name, but on behalf of the members ofsuch bodies or on behalf of such undertaking,are counterparties to such a transaction,Member States shall ensure through adequatesafeguards that such transaction does notconflict with the company's best interests.]

ContingentMandatoryProvisionAt present, 1990Act ss 31 et seqprovide restrictionson the amount ofloans.1963 Act s 194 willrequire disclosure atBoard meetings andin the book ofdeclarations ofinterest.

ContingentMandatoryProvisionPart A5, Head 17 etseq.; Part A5, Head12

56 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

57 OJ L 193, 18.7.1983, p. 1. Directive as last amended by Directive 2006/43/EC.

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Article 24

1. The acceptance of the company's ownshares as security, either by the company itselfor through a person acting in his own name buton the company's behalf, shall be treated as anacquisition for the purposes of Articles 19, 20(1), 22 and 23.

1983 Act ss 41, 44(1)

Part A3, Head 36;Part B2, Head 32(1)

2. The Member States may decide not toapply paragraph 1 to transactions concluded bybanks and other financial institutions in thenormal course of business.

1983 Act, s 44(2) Part B2, Head 32(2)

[Article 24a58

1. (a) The subscription, acquisition orholding of shares in a public limited-liabilitycompany by another company within themeaning of Article 1 of Directive 68/151/EECin which the public limited-liability companydirectly or indirectly holds a majority of thevoting rights or on which it can directly orindirectly exercise a dominant influence shallbe regarded as having been effected by thepublic limited-liability company itself;

(b) subparagraph (a) shall also apply wherethe other company is governed by the law of athird country and has a legal form comparableto those listed in Article 1 of Directive68/151/EEC.

EC (PLCSubsidiaries)Regulations 1997 SI67 of 1997, reg 5

Part A3, Head36(3)-(8); Part A3,Head 15(3)

2. However, where the public limited-liability company holds a majority of the votingrights indirectly or can exercise a dominantinfluence indirectly, Member States need notapply paragraph 1 if they provide for thesuspension of the voting rights attached to theshares in the public limited-liability companyheld by the other company.

Member StateOption1990 Act s 224

Member StateOptionPart A3, Head45(6)

3. In the absence of coordination ofnational legislation on groups of companies,Member States may:

Member StateOptions

Member StateOptions

58 Inserted by Council Directive 92/101/EEC of 23 November 1992 L 347 64 28.11.1992

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(a) define the cases in which a publiclimited-liability company shall be regarded asbeing able to exercise a dominant influence onanother company;

Part A1, Head 6;Part B10, Head 21

if a Member State exercises this option, itsnational law must in any event provide that adominant influence can be exercised if a publiclimited-liability company:

— has the right to appoint or dismiss amajority of the members of the administrativeorgan, of the management organ or of thesupervisory organ, and is at the same time ashareholder or member of the other company or

— is a shareholder or member of the othercompany and has sole control of a majority ofthe voting rights of its shareholders or membersunder an agreement concluded with othershareholders or members of that company.

Member States shall not be obliged to makeprovision for any cases other than thosereferred to in the first and second indents;

(a) 1963 Act, s 155;EC (PLCSubsidiaries)Regulations 1997 SI67 of 1997, reg 4

(b) define the cases in which a publiclimited-liability company shall be regarded asindirectly holding voting rights or as ableindirectly to exercise a dominant influence;

(b) 1963 Act, s 155;EC (PLCSubsidiaries)Regulations 1997 SI67 of 1997, reg 4

Part A1, Head 6;Part B10, Head 21

(c) specify the circumstances in which apublic limited-liability company shall beregarded as holding voting rights.

(c) 1963 Act, s 155;EC (PLCSubsidiaries)Regulations 1997 SI67 of 1997, reg 4

Part A1, Head 6;Part B10, Head 21

4. (a) Member States need not applyparagraph 1 where the subscription, acquisitionor holding is effected on behalf of a personother than the person subscribing, acquiring orholding the shares, who is neither the publiclimited liability company referred to inparagraph 1 nor another company in which thepublic limited-liability company directly orindirectly holds a majority of the voting rightsor on which it can directly or indirectly exercisea dominant influence.

Member StateOptionEC (PLCSubsidiaries)Regulations 1997 SI67 of 1997, reg5(6)(c)

Part A3, Head36(7)(c)

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(b) Member States need not applyparagraph 1 where the subscription, acquisitionor holding is effected by the other company inits capacity and in the context of its activities asa professional dealer in securities, provided thatit is a member of a stock exchange situated oroperating within a Member State, or isapproved or supervised by an authority of aMember State competent to superviseprofessional dealers in securities which, withinthe meaning of this Directive, may includecredit institutions.

Member StateOptionEC (PLCSubsidiaries)Regulations 1997 SI67 of 1997, reg5(6)(d)

Part A3, Head36(7)(d)

5. Member States need not applyparagraph 1 where shares in a public limited-liability company held by another companywere acquired before the relationship betweenthe two companies corresponded to the criterialaid down in paragraph 1.

Part A3, Head36(7)(b)

However, the voting rights attached to thoseshares shall be suspended and the shares shallbe taken into account when it is determinedwhether the condition laid down in Article 19(1) (b) is fulfilled.

Member StateOptionEC (PLCSubsidiaries)Regulations 1997 SI67 of 1997, reg5(6)(b)

6. Member States need not apply Article20 (2) or (3) or Article 21 where shares in apublic limited-liability company are acquiredby another company on condition that theyprovide for:

(a) the suspension of the voting rightsattached to the shares in the public limited-liability company held by the other company,and

Member StateOptionNot transposed

Member StateOptionNot transposed

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(b) the members of the administrative or themanagement organ of the public limited-liability company to be obliged to buy backfrom the other company the shares referred toin Article 20 (2) and (3) and Article 21 at theprice at which the other company acquiredthem; this sanction shall be inapplicable onlywhere the members of the administrative or themanagement organ of the public limitedliability company prove that that companyplayed no part whatsoever in the subscriptionfor or acquisition of the shares in question.]

Article 25

1. Any increase in capital must be decidedupon by the general meeting.

Both this decision and the increase in thesubscribed capital shall be published in themanner laid down by the laws of each MemberState, in accordance with Article 3 of Directive68/151/EEC.

1963 Act, ss 58, 68,70EC (Companies)Regulations 1973,SI 163 of 1973, regs4(1)(c), 5

Part A3, Head5(12); Part A3,Head 16(1); PartA2, Head 15(3)

2. Nevertheless, the statutes or instrumentof incorporation or the general meeting, thedecision of which must be published inaccordance with the rules referred to inparagraph 1, may authorize an increase in thesubscribed capital up to a maximum amountwhich they shall fix with due regard for anymaximum amount provided for by law.

1963 Act, ss 68, 70EC (Companies)Regulations 1973,SI 163 of 1973, reg4(1)(c)1983 Act, s 20

Part A3, Head16(1); Part A3,Head 26; Part A2,Head 15(3); PartA3, Head 5; PartB2, Head 14

Where appropriate, the increase in thesubscribed capital shall be decided on withinthe limits of the amount fixed, by the companybody empowered to do so. The power of suchbody in this respect shall be for a maximumperiod of five years and may be renewed one ormore times by the general meeting, each timefor a period not exceeding five years.

1983 Act, s 20Part A3, Head 5;Part B2, Head 14

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3. Where there are several classes ofshares, the decision by the general meetingconcerning the increase in capital referred to inparagraph 1 or the authorization to increase thecapital referred to in paragraph 2, shall besubject to a separate vote at least for each classof shareholder whose rights are affected by thetransaction.

1983 Act, s 38,1963 Act, s 78

Part B2, Head34/Part A3, Head21; Part A3, Head22

4. This Article shall apply to the issue ofall securities which are convertible into sharesor which carry the right to subscribe for shares,but not to the conversion of such securities, norto the exercise of the right to subscribe.

1983 Act, s 20(10) Part A3, Head 1

Article 26

Shares issued for a consideration, in the courseof an increase in subscribed capital, must bepaid up to at least 25 % of their nominal valueor, in the absence of a nominal value, of theiraccountable par. Where provision is made foran issue premium, it must be paid in full.

1983 Act, s 28(1) Part B2, Head 19(1)

Article 27

1. Where shares are issued for aconsideration other than in cash in the course ofan increase in the subscribed capital theconsideration must be transferred in full withina period of five years from the decision toincrease the subscribed capital.

1983 Act, s 29(1) Part B2, Head 20(1)

2. The consideration referred to inparagraph 1 shall be the subject of a reportdrawn up before the increase in capital is madeby one or more experts who are independent ofthe company and appointed or approved by anadministrative or judicial authority.

Such experts may be natural persons as well aslegal persons and companies and firms underthe laws of each Member State.

[Article 10(2) and (3) and Articles 10a and 10bshall apply.] 60

1983 Act, s 30 Part B2, Head 2159

59UK has a more expansive independence requirement – see 2006 Act, s1151.

60 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

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3.61 Member States may decide not to applyparagraph 2 in the event of an increase insubscribed capital made in order to give effectto a merger, a division or a public offer for thepurchase or exchange of shares and to pay theshareholders of the company which is beingabsorbed or divided or which is the object ofthe public offer for the purchase or exchange ofshares.

In the case of a merger or a division, however,Member States shall apply the firstsubparagraph only where an independentexpert's report on the draft terms of merger ordivision is drawn up.

Where Member States decide to applyparagraph 2 in the case of a merger or adivision, they may provide that the report underthis Article and the independent expert's reporton the draft terms of merger or division may bedrawn up by the same expert or experts.

Member StateOptionTransposed in part,in relation to or apublic offer for thepurchase orexchange of shares:1983 Act, s 30(2)

Member StateOptionTransposed in partPart B2, Head 21(2)does not includenewly insertedprovisions onmergers anddivisions

4. Member States may decide not to applyparagraph 2 if all the shares issued in the courseof an increase in subscribed capital are issuedfor a consideration other than in cash to one ormore companies, on condition that all theshareholders in the company which receive theconsideration have agreed not to have anexperts' report drawn up and that therequirements of Article 10 (4) (b) to (f) are met.

Member StateOptionNot transposed.

Member StateOptionNot transposed.

Article 28

Where an increase in capital is not fullysubscribed, the capital will be increased by theamount of the subscriptions received only if theconditions of the issue so provide.

1963 Act, s 53(Minimumsubscription andamount payable onapplication)

Part B2, Head 105

61 Paragraph 3 substituted by Directive 2009/109/EC, Article 1.3. Former paragraph 3 provided:“Member States may decide not to apply paragraph 2 in the event of an increase insubscribed capital made in order to give effect to a merger or a public offer for thepurchase or exchange of shares and to pay the shareholders of the company which isbeing absorbed or which is the object of the public offer for the purchase or exchange ofshares.”

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Article 29

1. Whenever the capital is increased byconsideration in cash, the shares must beoffered on a pre-emptive basis to shareholdersin proportion to the capital represented by theirshares.

1983 Act, s 23(1) Part A3, Head 5(5)

2. The laws of a Member State:

(a) need not apply paragraph 1 above toshares which carry a limited right to participatein distributions within the meaning of Article15 and/or in the company's assets in the eventof liquidation; or

Member StateOption1983 Act, s 23(13)

Member StateOptionPart A3 1(1); PartA3, Head 5(7)

(b) may permit, where the subscribedcapital of a company having several classes ofshares carrying different rights with regard tovoting, or participation in distributions withinthe meaning of Article 15 or in assets in theevent of liquidation, is increased by issuingnew shares in only one of these classes, theright of pre-emption of shareholders of theother classes to be exercised only after theexercise of this right by the shareholders of theclass in which the new shares are being issued.

1983 Act, s 23(2) Part A3, Head 5(6)

3. Any offer of subscription on a pre-emptive basis and the period within which thisright must be exercised shall be published inthe national gazette appointed in accordancewith Directive 68/151/EEC.

However, the laws of a Member State need notprovide for such publication where all acompany's shares are registered. In such case,all the company's shareholders must beinformed in writing.

The right of pre-emption must be exercisedwithin a period which shall not be less than 14days from the date of publication of the offer orfrom the date of dispatch of the letters to theshareholders.

1983 Act, s 23(7),(8).The 1983 Actprovides for anoffer period of 21days rather than the14 day period in theDirective.

Part A3, Head 5(5)-(6)Already providesfor a 14 day offerperiod inaccordance withRecommendation13.

4. The right of pre-emption may not berestricted or withdrawn by the statutes orinstrument of incorporation.

1983 Act, s 24 Part A3, Head 5(7)

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This may, however, be done by decision of thegeneral meeting.

The administrative or management body shallbe required to present to such a meeting awritten report indicating the reasons forrestriction or withdrawal of the right of pre-emption, and justifying the proposed issueprice.

The general meeting shall act in accordancewith the rules for a quorum and a majority laiddown in Article 40.

1983 Act, s 24(1),increasing theArticle 40 66⅔% or 50%+ of 50% ofshares in issue, tothe standard 75%special resolution.

Part A3, Head5(7)(b)

Its decision shall be published in the mannerlaid down by the laws of each Member State, inaccordance with Article 3 of Directive68/151/EEC.

1963 Act s143(4)(a)

5. The laws of a Member State mayprovide that the statutes, the instrument ofincorporation or the general meeting, acting inaccordance with the rules for a quorum, amajority and publication set out in paragraph 4,may give the power to restrict or withdraw theright of pre-emption to the company bodywhich is empowered to decide on an increase insubscribed capital within the limit of theauthorized capital.

This power may not be granted for a longerperiod than the power for which provision ismade in Article 25 (2).

Member StateOption1983 Act, s 24(1)

Member StateOptionPart A3, Head 5(7)No maximumperiod for exercisespecified

6. Paragraphs 1 to 5 shall apply to theissue of all securities which are convertible intoshares or which carry the right to subscribe forshares, but not to the conversion of suchsecurities, nor to the exercise of the right tosubscribe.

1983 Act, s 23(13)Part A3 1(1); PartA3, Head 5(7)

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7. The right of pre-emption is not excludedfor the purposes of paragraphs 4 and 5 where,in accordance with the decision to increase thesubscribed capital, shares are issued to banks orother financial institutions with a view to theirbeing offered to shareholders of the company inaccordance with paragraphs 1 and 3.

Not at presenttransposed, Until 1July 2005,1963 Act, s 51provided that anallotment with aview to resale wasconsidered to be anoffer to the publicby the company.

Article 30

Any reduction in the subscribed capital, exceptunder a court order, must be subject at least to adecision of the general meeting acting inaccordance with the rules for a quorum and amajority laid down in Article 40 withoutprejudice to Articles 36 and 37. Such decisionshall be published in the manner laid down bythe laws of each Member State in accordancewith Article 3 of Directive 68/151/EEC.

The notice convening the meeting must specifyat least the purpose of the reduction and theway in which it is to be carried out.

1963 Act, s 72Part A3, Head 17;Part A4, Head52(6)

Article 31

Where there are several classes of shares, thedecision by the general meeting concerning areduction in the subscribed capital shall besubject to a separate vote, at least for each classof shareholders whose rights are affected by thetransaction.

1983 Act, s 38,1963 Act, s 78

Part B2, Head34/Part A3, Head21; Part A3, Head22

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Article 3262 [1. In the event of a reduction in thesubscribed capital, at least the creditors whoseclaims antedate the publication of the decisionon the reduction shall at least have the right toobtain security for claims which have not fallendue by the date of that publication. MemberStates may not set aside such a right unless thecreditor has adequate safeguards, or unless suchsafeguards are not necessary having regard tothe assets of the company.

Member States shall lay down the conditionsfor the exercise of the right provided for in thefirst subparagraph. In any event, MemberStates shall ensure that the creditors areauthorised to apply to the appropriateadministrative or judicial authority for adequatesafeguards provided that they can crediblydemonstrate that due to the reduction in thesubscribed capital the satisfaction of theirclaims is at stake, and that no adequatesafeguards have been obtained from thecompany.]

1963 Act, s 73(2),as amended by EC(PLCDirective2006/68/EC)Regulations 2008,S.I.No. 89 of 2008, reg3

Part A3, Head18(3) ; Part A4,Head 71(4)(b), (9)

2. The laws of the Member States shallalso stipulate at least that the reduction shall bevoid or that no payment may be made for thebenefit of the shareholders, until the creditorshave obtained satisfaction or a court hasdecided that their application should not beacceded to.

1963 Act, s 72

Part A3, Head 17[Query: ExamineValidationProcedure at PartA4, Head 71 forcompliance]

3. This Article shall apply where thereduction in the subscribed capital is broughtabout by the total or partial waiving of thepayment of the balance of the shareholders'contributions.

1963 Act, s 72 Part A3, Head 17

62 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

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Article 33

1. Member States need not apply Article32 to a reduction in the subscribed capitalwhose purpose is to offset losses incurred or toinclude sums of money in a reserve providedthat, following this operation, the amount ofsuch reserve is not more than 10 % of thereduced subscribed capital.

Except in the event of a reduction in thesubscribed capital, this reserve may not bedistributed to shareholders; it may be used onlyfor offsetting losses incurred or for increasingthe subscribed capital by the capitalization ofsuch reserve, in so far as the Member Statespermit such an operation.

Member StateOptionNot transposed

Member StateOptionNot transposed

2. In the cases referred to in paragraph 1the laws of the Member States must at leastprovide for the measures necessary to ensurethat the amounts deriving from the reduction ofsubscribed capital may not be used for makingpayments or distributions to shareholders ordischarging shareholders from the obligation tomake their contributions.

Not transposed, butwould be caught by1963 Act, s 72

Part A3, Head 17

Article 34

The subscribed capital may not be reduced toan amount less than the minimum capital laiddown in accordance with Article 6.

1983 Act, s 17 Part B2, Head 59

However Member States may permit such areduction if they also provide that the decisionto reduce the subscribed capital may take effectonly when the subscribed capital is increased toan amount at least equal to the prescribedminimum.

Member StateOptionNot transposed

Member StateOptionNot transposed

Article 35

Where the laws of a Member State authorizetotal or partial redemption of the subscribedcapital without reduction of the latter, they shallat least require that the following conditions areobserved:

ContingentMandatoryProvision1990 Act, s 207

ContingentMandatoryProvisionPart A3, Head 38

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(a) where the statutes or instrument ofincorporation provide for redemption, the lattershall be decided on by the general meetingvoting at least under the usual conditions ofquorum and majority.

Where the statutes or instrument ofincorporation do not provide for redemption,the latter shall be decided upon by the generalmeeting acting at least under the conditions ofquorum and majority laid down in Article 40.The decision must be published in the mannerprescribed by the laws of each Member State,in accordance with Article 3 of Directive68/151/EEC;

(b) only sums which are available fordistribution within the meaning of Article 15(1) may be used for redemption purposes;

(c) shareholders whose shares are redeemedshall retain their rights in the company, with theexception of their rights to the repayment oftheir investment and participation in thedistribution of an initial dividend onunredeemed shares.

Article 36

1. Where the laws of a Member State mayallow companies to reduce their subscribedcapital by compulsory withdrawal of shares,they shall require that at least the followingconditions are observed:

(a) compulsory withdrawal must beprescribed or authorized by the statutes orinstrument of incorporation before subscriptionof the shares which are to be withdrawn aresubscribed for;

n/a

(b) where the compulsory withdrawal ismerely authorized by the statutes or instrumentof incorporation, it shall be decided upon by thegeneral meeting unless it has been unanimouslyapproved by the shareholders concerned;

ContingentMandatoryProvisionNot applicable inIreland

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(c) the company body deciding on thecompulsory withdrawal shall fix the terms andmanner thereof, where they have not alreadybeen fixed by the statutes or instrument ofincorporation;

(d) Article 32 shall apply except in the caseof fully paid-up shares which are madeavailable to the company free of charge or arewithdrawn using sums available for distributionin accordance with Article 15 (1); in thesecases, an amount equal to the nominal value or,in the absence thereof, to the accountable par ofall the withdrawn shares must be included in areserve.

Except in the event of a reduction in thesubscribed capital this reserve may not bedistributed to shareholders. It can be used onlyfor offsetting losses incurred or for increasingthe subscribed capital by the capitalization ofsuch reserve, in so far as Member States permitsuch an operation;

(e) the decision on compulsory withdrawalshall be published in the manner laid down bythe laws of each Member State in accordancewith Article 3 of Directive 68/151/EEC.

2. Articles 30 (1), 31, 33 and 40 shall notapply to the cases to which paragraph 1 refers.

Article 37

1. In the case of a reduction in thesubscribed capital by the withdrawal of sharesacquired by the company itself or by a personacting in his own name but on behalf of thecompany, the withdrawal must always bedecided on by the general meeting.

ContingentMandatoryProvisionNot applicable inIreland

n/a

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2. Article 32 shall apply unless the sharesare fully paid up and are acquired free ofcharge or using sums available for distributionin accordance with Article 15 (1); in these casesan amount equal to the nominal value or, in theabsence thereof, to the accountable par of allthe shares withdrawn must be included in areserve. Except in the event of a reduction inthe subscribed capital, this reserve may not bedistributed to shareholders. It may be used onlyfor offsetting losses incurred or for increasingthe subscribed capital by the capitalization ofsuch reserve, in so far as the Member Statespermit such an operation. 3. Articles 31, 33 and40 shall not apply to the cases to whichparagraph 1 refers.

Article 38

In the cases covered by Articles 35, 36 (1) (b)and 37 (1), when there are several classes ofshares, the decision by the general meetingconcerning redemption of the subscribedcapital or its reduction by withdrawal of sharesshall be subject to a separate vote, at least foreach class of shareholders whose rights areaffected by the transaction.

1983 Act, s 38Part B2, Head34/Part A3, Head21

Article 39

Where the laws of a Member State authorizecompanies to issue redeemable shares, theyshall require that the following conditions, atleast, are complied with for the redemption ofsuch shares:

ContingentMandatoryProvision

ContingentMandatoryProvision

(a) redemption must be authorized by thecompany's statutes or instrument ofincorporation before the redeemable shares aresubscribed for;

1983 Act, s 207(1)

Part A3, Head38(1), (3)[Note: Not requiredto be authorised inarticles – see Head38(3)]

(b) the shares must be fully paid up;1983 Act, s207(2)(b)

Omitted in GeneralScheme

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(c) the terms and the manner of redemptionmust be laid down in the company's statutes orinstrument of incorporation;

1983 Act, s 207 (1)

Part A3, Head38(1), (3)[Note: Not requiredto be authorised inarticles – see Head38(3)]

(d) redemption can be only effected byusing sums available for distribution inaccordance with Article 15 (1) or the proceedsof a new issue made with a view to effectingsuch redemption;

1983 Act, s 207(2)(d)

Part A3, Head38(1)

(e) an amount equal to the nominal valueor, in the absence thereof, to the accountablepar of all the redeemed shares must be includedin a reserve which cannot be distributed to theshareholders, except in the event of a reductionin the subscribed capital; it may be used onlyfor the purpose of increasing the subscribedcapital by the capitalization of reserves;

1983 Act, s 208(b)Part A3, Head38(10)

(f) subparagraph (e) shall not apply toredemption using the proceeds of a new issuemade with a view to effecting such redemption;

1983 Act, s 207(2)(f)

Part A3, Head38(2)

(g) where provision is made for thepayment of a premium to shareholders inconsequence of a redemption, the premiummay be paid only from sums available fordistribution in accordance with Article 15 (1),or from a reserve other than that referred to in(e) which may not be distributed toshareholders except in the event of a reductionin the subscribed capital; this reserve may beused only for the purposes of increasing thesubscribed capital by the capitalization ofreserves or for covering the costs referred to inArticle 3 (j) or the cost of issuing shares ordebentures or for the payment of a premium toholders of redeemable shares or debentures;

1983 Act, s 207(2)(e)

Omitted in GeneralScheme

(h) notification of redemption shall bepublished in the manner laid down by the lawsof each Member State in accordance withArticle 3 of Directive 68/151/EEC.

1963 Act, s 69;1990 Act, s 226

Part A3, Head 25;Part A3, Head 48;Part B2, Head 54

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Article 40

1. The laws of the Member States shallprovide that the decisions referred to in Articles29 (4) and (5), 30, 31, 35 and 38 must be takenat least by a majority of not less than two-thirdsof the votes attaching to the securities or thesubscribed capital represented.

Where transposed,75% has beenadopted asthe percentage.

2. The laws of the Member States may,however, lay down that a simple majority of thevotes specified in paragraph 1 is sufficientwhen at least half the subscribed capital isrepresented.

Member StateOptionNot transposed.

Member StateOptionNot transposed.

Article 41

[1. Member States may derogate fromArticle 9(1), the first sentence of point (a) ofArticle 19(1), and Articles 25, 26 and 29 to theextent that such derogations are necessary forthe adoption or application of provisionsdesigned to encourage the participation ofemployees, or other groups of persons definedby national law, in the capital of undertakings.]63

Member StateOptionTransposed for thepurposes ofemployee shareschemes.Requirement thatshares be paid up asto 25% par value,requirement forauthorisation todirectors to allotand for non-pre-emptive allotmentsdo not apply.1983 Act, ss 28(4),20(10), 23(6).

Member StateOptionPart B2, Head19(4); Part A3,Head 5(7)(e)

2. Member States may decide not to applyArticle 19 (1) (a), first sentence, and Articles30, 31, 36, 37, 38 and 39 to companiesincorporated under a special law which issueboth capital shares and workers' shares, thelatter being issued to the company's employeesas a body, who are represented at generalmeetings of shareholders by delegates havingthe right to vote.

Member StateOptionNot transposed.

Member StateOptionNot transposed.

63 Inserted by Directive 2006/68/EC of the European Parliament and of the Council of 6 September2006 L 264 32 25.9.2006.

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Article 42

For the purposes of the implementation of thisDirective, the laws of the Member States shallensure equal treatment to all shareholders whoare in the same position.

Not explicitlytransposed. Generalcompany lawensures this.Acknowledged in1990 Act s 211(4),as inserted by SI 89of 2008.

Omitted in GeneralScheme

Article 43

1. Member States shall bring into force thelaws, regulations and administrative provisionsneeded in order to comply with this Directivewithin two years of its notification.

They shall forthwith inform the Commissionthereof.

2. Member States may decide not to applyArticle 3 (g), (i), (j) and (k) to companiesalready in existence at the date of entry intoforce of the provisions referred to in paragraph1.

They may provide that the other provisions ofthis Directive shall not apply to such companiesuntil 18 months after that date.

However, this time limit may be three years inthe case of Articles 6 and 9 and five years inthe case of unregistered companies in theUnited Kingdom and Ireland.

3. Member States shall ensure that theycommunicate to the Commission the text of themain provisions of national law which theyadopt in the field covered by this Directive.

Article 44

This Directive is addressed to the MemberStates.